Growing consumer confidence at a time of rising interest rates could prove an unfortunate mix if Australians resume their love affair with credit.

There has been a lot of talk about the growth of debit cards (the plastic that uses your own money) at the expense of credit cards in the past year amid the global financial crisis.

But analysts say debit cards, while increasingly popular, are being used for smaller transactions and credit cards still dominate in dollar terms. Reserve Bank statistics released last week show credit card debt is actually higher than a year ago. According to the RBA, there were 14.4 million credit and charge cards out there in August and we used them for $18.9 billion in purchases and cash advances.

That left us with a total balance of $44.9 billion, or an average of $3131 each. Of that, $32.5 billion – or 72 per cent – was accruing interest because it wasn't paid off in full by the due date.

In the same month a year ago – just before the collapse of Lehman Brothers triggered a full-scale crisis – we had 14.1 million cards and had accumulated $17.8 billion in purchases and cash advances. The total card balance was $44 billion – or an average of $3127 – of which 71 per cent was accruing interest.

“To date, credit card spending hasn't declined and that's what sets Australia apart from most countries,” says Mike Ebstein, principal of MWE Consulting and a former senior manager of ANZ Bank's credit cards business. “The growth has slowed but [spending] has still grown.”

Still, there's evidence card holders have been taking their debt more seriously – in nine of the past 12 months, we paid off more than we spent, according to RBA data.

The head of external relations for credit reporting group Veda Advantage, Chris Gration, says its research showed a big shift towards saving late last year but that trend had reversed a little in the follow-up debt study it released earlier this month.

Certainly, this month's Westpac-Melbourne Institute Index of Consumer Sentiment is more upbeat. The main index is up 1.7 per cent, even after the Reserve Bank's decision to lift its official cash rate by 0.25 of a percentage point.

The chief economist at Westpac, Bill Evans, isn't sure the good mood will feed through to actual spending, however. While the “expectations” part of the index is at its highest since the survey began in 1975, the survey found sentiment about “current” conditions remains well below its peak.

“Being optimistic about the future but still somewhat constrained financially may mean consumers remain more cautious,” Evans says.

If you're an optimist and you're thinking about hitting the plastic again, here's 10 things you should know about your credit card:

Credit card rates move in mysterious ways

The chief executive at InfoChoice, Shaun Cornelius, says that on the way up card rates generally increase by more than the RBA's official rate and on the way down they decrease by less than the RBA rate.

When rates rose in early 2008, the RBA moved 0.5 of a percentage point higher in two bites but low-rate cards snuck up 0.55 of a point and standard cards about 1 percentage point.

Over the past year, the RBA shaved a whopping 4.25 percentage points off the cash rate but low-rate cards fell a measly 0.25 of a percentage point and standard cards just 1.60 percentage points, according to InfoChoice.

After last month's official rate rise – which many cards followed – the RBA's cash rate is 3.5 percentage points below where it was in January 2008 but standard credit card rates are only 0.65 of a percentage point lower and low-rate cards are actually 0.2 of a percentage point higher than they were.

Financial markets believe the RBA is now on the path to restoring its cash rate to about 5 per cent.

“If the RBA increases rates by 2 per cent in the next 12 months we could see low-rate cards going from 11.95 per cent to around 14.95 per cent,” Cornelius says.

InfoChoice says there has been a dramatic increase in the gap between the RBA cash rate and the average low-rate card – the sort of card you should be using if you don't pay your balance in full each month – from 5 per cent in early 2008 to a margin of 9 per cent now.

“As the economy improves and rates increase, we'd like to see this margin reduce back to around 5 per cent,” Cornelius says.

“The extra 4 per cent margin the banks have extracted could be costing Australians as much as $1 billion in extra interest.”

One card can have different interest rates

InfoChoice also warns that credit card providers are increasingly inclined to charge different rates on the one card, with very high rates applying to cash advances. While the rate that's advertised will be the normal rate for straight purchases, a significantly higher rate may be charged for cash – 29.49 per cent in the case of GE's Money GO MasterCard.

In the accompanying table of lowest-rate cards, BankWest is No. 2 with an attractive purchase rate of 9.99 per cent but the rate more than doubles to 20.49 per cent for cash advances.

And, remember, while a standard card may offer an interest-free period, it usually won't apply to cash advances. In most cases you'll pay interest on an advance from the time you take the cash. There may also be a “withdrawal” fee.

Be aware, too, that paying a bill using BPay can be regarded as a cash advance rather than a purchase.

Balance transfers can have a sting in the tail

If you're concerned about rates, transferring your existing debt to a card that has a low, even zero per cent, introductory rate might be tempting.

But the senior finance writer at Choice, Alan Dooley, says in his new book, Recession-Proof Your Finances (Choice Books, $26.95), that there are traps for the unwary.

For instance, it might be stipulated that any new purchases – as opposed to the debt you've transferred – will attract interest at a high, standard rate, not the discount rate. Also, any repayments may be applied last to the more expensive part of your debt.

Late-payment fees apply even during the six-month interest-free period, Dooley says.

Late payments are costly

Dooley says many card providers use “sly” tactics to extract maximum interest from people who pay their bill late, or not in full.

Apart from straight-out late-payment fees – perhaps $30 – they may cancel your interest-free days on new purchases if you don't pay your previous balance in full by the due date.

“When you pay some of the bill on time [but not the full bill] they'll charge daily interest backdated to when the original purchase was made or when it hit your account,” Dooley says.

The minimum repayment has little to do with clearing debt

Minimum repayment levels vary from card to card, ranging from 1.5 per cent to 5 per cent a month but most commonly 2 per cent.

According to the Australian Securities and Investments Commission credit card calculator (at fido.gov.au), if you pay just the minimum 2 per cent each month on a $10,000 credit card debt – and don't spend any more – it will take 62 years and 8 months to clear the debt, at the cost of $32,457 in interest.

Make your minimum $250 instead of $200, though, and you'll pay the card off in five years and four months.

Surcharges can mount up, particularly online

Merchants can apply a surcharge to cover the fees they're charged by card providers but must declare this upfront.

However, Choice says airlines in particular are slugging people with hefty credit card booking fees “at levels higher than can be justified”. Qantas charges $7.70 for credit card payment for a domestic or New Zealand flight and $25 for all other international tickets, while Tiger imposes a credit card “convenience fee” of $6 a passenger.

Choice says the practice hits cheaper fares and internet specials disproportionately because it's a flat fee, not a percentage. Use a debit card to avoid these fees.

Cancelling credit cards doesn't necessarily improve your credit report.

It's true that having fewer cards can make you more creditworthy but Veda Advantage says it depends on how you go about cancelling existing cards.

If you pay off a card using your own money before cancelling it, that will help your credit score at the bank you had the card with, though it won't necessarily show up on your full credit report, Veda's general manager, Russell Evans, says.

“However, if you borrow money to pay off your credit card debt, your credit score won't improve and your credit report is likely to show the [loan] inquiry – making it harder to get [more] credit.”

If you don't sign your card, you're not protected

In the US, some card holders have started to promote the idea that if you don't sign your card no one can forge your signature. But a spokeswoman for the local arm of Visa International says you have an obligation to sign your card because the signature is a form of verification. “If the card holder doesn't sign the signature panel, they won't be protected in the case of unauthorised use of the card,” she says. A MasterCard spokesman says merchants would consider an unsigned card invalid.

There's no such thing as a minimum purchase

Occasionally, stores will display a sign saying that credit cards won't be accepted for purchases below a certain amount. But Visa and MasterCard say it's a violation of their rules to specify a minimum transaction amount.

Talk to the store manager and, if necessary, go to your card issuer. Amex says the merchant has some leeway but the majority "understand that they'll lose sales with these restrictions".

Read the fine print on purchase warranties and travel insurance

It's a misconception that using a credit card automatically bestows a purchase warranty. Warranties aren't a standard feature on all cards; they are more likely to be linked to premium cards.

MasterCard says if you've paid for a product but you haven't received it or it's faulty, yes, you should ask your card provider whether you are eligible for a refund – making sure you act within the specified timeframe for disputes.

But the head of cards and retail alliances at HSBC Bank Australia, Keith Lewis, says that when it comes to full purchase protection insurance or extended warranties, “the cover provided differs between card types as well as issuers, so it's important to check the specific terms and conditions that apply to your card”.

The same goes for travel insurance. The Financial Ombudsman Service says that it's crucial to obtain a copy of the

policy wording and read it carefully to see that it meets your particular needs – such as covering existing medical conditions.

You also need to determine you have done everything to ensure the cover is activated. For instance, you may need to pay all or a specified amount of your travel costs with your card to qualify.

Key points

Consumer confidence is building and credit card debt is higher.

But official rates are tipped to rise a further 2 percentage points.

And credit card rate rises usually outstrip official rates.

Card providers held back much of last year's rate cuts.

LOWEST RATE CREDIT CARDS
mecu Low Rate Visa 9.14 9.14 0 $59
BankWest Lite MasterCard 9.99 20.49 55 $59
Community First McGrath Pink Visa 10.50 10.50 55 $40
Sydney Credit Union Low Rate Visa 10.64 10.64 55 $30
Heritage Bldg Soc. Visa Gold No Frills 10.75 10.75 0 $0
Bananacoast Comm. CU Classic Visa 10.80 10.80 55 $45
Police Credit Union Visa Credit 10.96 10.96 55 $30
BankSA Vertigo MasterCard 10.99 19.99 55 $55
Citibank Clear Platinum 10.99 20.74 55 $85
Hunter United Visa Credit 10.99 10.99 55 $48
Members Equity MasterCard 10.99 10.99 44 $39
NAB Low Rate Visa 10.99 19.99 55 $49
Card Purchase
Rate (%)
Cash Advance
Rate (%)
CURRENT AS AT 15 OCTOBER 2009 SOURCE: INFOCHOICE.COM.AU
Interest
Free Days
Annual
Fee
BIG 4 LOW RATE CREDIT CARDS
Card Purchase
Rate (%)
Cash Advance
Rate (%)
Interest
Free Days
Annual
Fee
ANZ Low Rate MasterCard 11.74 19.99 55 $58
Commonwealth Low Rate Credit 11.99 20.24 55 $48
NAB Low Rate Visa 10.99 19.99 55 $49
Westpac Low Rate 11.74 19.98 55 $45