Australians pay about $2.8 billion a year in interest on their credit cards. We have outstanding debt of

$31 billion and about two-thirds of that - $23.1 billion, according to the Reserve Bank - attracts interest.

Even if you assign a conservative annual interest rate of 12 per cent to that debt, consumers hand over a whopping $2.8 billion in interest.

At Christmas, our spending generally increases by about 15 per cent, according to MWE Consulting principal Mike Ebstein.

"The spike in spending on cards is not as great as it used to be," he says. "But it still rises, and that rise at Christmas is substantial."

Financial counsellor Jan Pentland, the chairwoman of the Australian Financial Counselling and Credit Reform Association, says: "Credit cards are a problem across all income groups. I've just seen a woman who earns in the region of $80,000; she has four credit cards and two personal loans. A crisis comes about because people aren't good at managing their money."

Pentland says middle and high-income earners are as vulnerable as those with low incomes. "They get behind and then they get offered a higher credit limit," she says. "Sometimes they think that, if the bank is offering them more money, the bank must think they can afford to pay it back. But if you keep spending, your debts quickly mount to more than your earnings."

The average Australian has an outstanding credit-card balance of $2592. Ebstein says it takes on average three months to clear that debt, although he adds that Reserve Bank data shows consumers make a big effort to pay off their cards in January after the December spree.

According to the Reserve figures, spenders had slightly less debt on their cards in September compared with August. Ebstein says September data also shows that more purchases were made with debit rather than credit cards - a significant move in a market that has been dominated by credit growth for a decade.

CommSec economist Craig James says consumers are paying more attention to household debt and that's reflected in credit-card balances. "House prices are no longer rising in most cities," he says. "They are going sideways at best. When your asset prices are not increasing by 10 to 15 per cent a year you tend to watch your debt more closely."

He adds that a 12-month spike in petrol prices has also curbed discretionary spending. "People are keeping their cards under control because the rise in petrol prices is hitting their hip pocket."

Consumers are also watching more closely the interest rates they pay on credit cards. Ebstein says credit cards are by far and away our preferred choice when it comes to paying for goods and services, but debit cards are also making a mark. He says this reflects the fact the card market has changed considerably.

"Cards are generally more expensive and the loyalty programs are not as good," he says. "Consumers know that."

Multimillionaire financier and chairman of home lending company Wizard, Mark Bouris, says the card market is polarising.

"People are extremely smart when it comes to a home loan," he says. "You can't baffle them on interest rates. That's starting to happen in the credit-card market. It will happen more as people really start to compete."

Wizard has launched its Clear Advantage MasterCard, which has no annual fees, up to 55-days interest free and a 12.4 per cent interest rate.

But there are no rewards. The card currently offers six months of zero interest on balance transfers, but cardholders will pay interest on new purchases. There are no fees for withdrawals from ATMs.

It's a young person's card, Bouris says: "Young people are very cynical about reward programs and the cost of them. They want a low rate."

GE Money underwrites the Wizard card. It is a global finance house that also underwrites store cards such as the Coles Myer Source card and the just-launched Harvey Normal MasterCard, known as the Go Card. It also has a hand in store credit offers from retailers including The Good Guys and Forty Winks.

The range and complexity of credit offers, which covers special interest-free deals, shows just how fluid the Australian card market has become. Even that bastion of high-service, high-value cards, American Express, has entered the low-rate market, offering a gold card with an 11.99 per cent interest rate.

The card comes with a $50,000 credit limit and consumers get one reward point for every dollar spent. It has a $70 annual fee (waived if you spend $18,000 a year or more) and a $59 fee for the rewards program.

"It is a premium product that comes with a low rate but full rewards," says American Express' director of lending products, Fady Taouk.

The minimum monthly repayment is 3 per cent of the balance, and the card offers 55-days interest free.

More than 70 per cent of cardholders are "revolvers" or people who carry debt on their credit card from one month into the next, Ebstein says.

If you carry debt from one month to the next, you lose your "interest-free days". You must repay the balance entirely each month to qualify for any interest-free period.

Ebstein says the fact that American Express has entered the low-rate end of the market is significant. "Low-rate cards have been the fastest-growing market segment," he says. "American Express can see that."

The Wizard credit card doesn't sit entirely comfortably within the low-rate stable. At 12.40 per cent, it is still above the lowest rate cards from Encompass and InTech Credit Union, but it does not have an annual fee.

The Savings and Loan Credit Union, BankWest and Virgin also have cards with no annual fees. Interest rates on cards with no annual fee or a low annual fee range from 9.85 per cent for Encompass to 18.50 per cent for the GE Money Coles Myer Source card.

Carolyn Bond, from the Consumer Credit Legal Service in Victoria, says people who have cards with a high interest rate generally expect they will pay off their cards in full each month, and collect points for rewards.

"If you pay off your card each month, then it doesn't matter what the interest rate is," says Bond. "If you've got no outstanding debt then you won't have to pay interest."

She says, however, that most people are more optimistic than realistic about their spending and repayment habits. "People tend to chose a product thinking they will use it responsibly," Bond says. "But that doesn't always happen. Credit cards are a trap.They are a bigger problem than anything else."

The director of policy and research at the University of NSW Financial Services Consumer Policy Centre, Khaldoun Hajaj, says high rates finance reward programs. "The rates on most cards are very high," Hajaj says. "The reward programs encourage people to spend, but they get little in return."

In fact, the Australian Consumers Association found that unless you are a big spender and pay off your card in full each month you're better off with a low-rate card.

The association says if you spend $2000 a month, the best cards will give you Qantas frequent flyer points worth about $500 a year or shopping or travel agency vouchers worth about $200. But it warns that high annual fees could eat into the value of the card. If you pay interest on purchases then the rewards are not worth it.

The lowest-rate card comes from InTech Credit Union, which has 9.55 per cent, but a $36 annual fee and no interest-free period.

Encompass Credit Union has a Visa card with a 9.85 per cent rate, $24 annual fee and 55-days interest-free. Encompass' marketing and business development manager, Theresa Garten, says: "The card suits our members to have a low interest rate. Not all of them can afford to pay off their card every month." The card does not have a rewards program but it offers up to 55-days interest free.

"The low rate has been successful," Garten says. "We have had a steady flow of applications for the card because it is simple."

Bank of Queensland and HSBC also offer low-rate cards, with low annual fees. The Bank of Queensland has a Visa card with a 9.99 per cent rate and 44-days interest free. It has a $49 annual fee and no rewards program.

"We wanted to keep it simple," says its head of marketing, Mark Franzman. "Most people, when they use a credit card, don't think they will run with an outstanding balance from one month to the next. If you're carrying a balance, you need a lower rate card."

Franzman says this frequently applies to younger cardholders.

But the bank has an array of cards on offer, hoping to meet the needs of everyone. It offers a credit card that has a rewards program, no annual fee but no interest-free days. It also has a card with rewards and interest-free days.

HSBC also has multiple cards, says its head of consumer finance, Rod Hyde. Its low-rate card was launched last year.

Hyde says the Reserve Bank reforms did cost banks, which then diluted reward programs. "Customers don't see a lot of value in those programs any more," he says.

Hyde adds that card rates have come down so low that the line between personal loans and credit card cash advances has blurred.

"A traditional personal loan is for an amount about $12,000," he says. "The average credit limit on a card is $7000. But the rates are merging."

Indeed, the Members Equity credit card, with a $30 annual fee and 44-days interest free, offers the same 10.2 per cent interest rate no matter how the card is used.

"It doesn't matter whether the card is used for purchases or cash advances," says spokeswoman Sandra Sharan. "The same rate applies." There is no reward program, but, Sharan adds: "The reward is the low rate and low fees."

Cash advances attract a flat $1.25 fee per advance, plus 10.2 per cent interest from the day the cash is advanced. Unlike some other card issuers, Members Equity does not take a second fee, a percentage of the amount withdrawn.

But Sharan cautions against using a credit card in place of a personal loan. "Some people need the discipline of monthly repayments to reduce their debt."

CREDIT CARD CHECKLIST

The most common advice on credit cards remains true: pay your card off in full each month and you won't pay high interest rates or get deeper into debt.

"If you make the minimum monthly repayment, it will take you years to pay it off," says InfoChoice spokesman Denis Orrock, who offers these tips.

* Be aware that if you have an outstanding balance on your card and you make new purchases, you immediately lose your "interest-free" days. For example, if you have a $1000 balance owing, and then you buy a TV, you start paying interest from the date of purchase.

* Cash advances are never interest-free. Card issuers often charge multiple fees for cash and you often pay interest at a higher rate.

* Before you travel overseas, work out fees and charges on foreign currency transactions.

* Look closely at reward programs. "If you are paying more than 13 per cent a year in interest, plus a fee for a reward program, you're probably a knucklehead," Orrock says. "There's so much competition in the card market. A lot of these programs are no longer worth the fees and the high interest rates."

* If you transfer your balance in a "zero interest" offer, ask the card-issuer which debt is paid off first. When you make repayments, does the money pay off the balance transfer, or the cost of new purchases, which will attract interest at higher rates?

* Make sure your limit does not exceed your ability to make repayments. Credit limits should be no more than twice your monthly income. Anything higher and you can get into trouble.

MY CASH WORKS FOR ME

Sharon McGregor is a true believer in the notion that you should put your money to work. The police officer from Glen Waverly, Victoria, says she recently moved her two property loans to Members Equity and then took an ME MasterCard to make sure she hangs on to her money for as long as she can.

"I use the credit card for everything," McGregor says. "But I pay it off in full each month. The low interest rate is attractive, but I like the interest-free days."

McGregor says she recently paid about $1000 in council rates and car insurance using her card. "But I know that my money will stay in my mortgage offset account until January, when my credit card bill has to be paid," she says. "That's got to be worth a few dollars."

McGregor says she has always been a diligent budgeter. In the past, she would pay small amounts off her utilities bills in advance, for example, $12 a fortnight. "But that meant someone else was getting the interest on my money, because I was paying the bills in advance in instalments. Now I use the card, and the money sits in my account.

"I have never really had a credit card, just debit cards. I like to hold on to my own money for as long as I can. That way, it is earning interest for me, working hard for me," she says.

McGregor says as a teenager she was impressed by an article that asked: "Why work hard for your money, why not get it to work hard for you?"

"I've stuck with that," she says. "I find the reward programs on other cards difficult - it's hard to get the rewards after you've earned the points and that's frustrating. Once you've paid fees to be a member of those schemes you also have to ask whether it's worth the money."