Switch to a better credit card and save

Switch to a better credit card and save

Credit cards can be a great tool if you don’t want to carry cash, or if you want to buy something but don’t have enough money in your current account. They have a number of advantages over cash or debit cards – you can build up your credit rating, take advantage of interest-free days, earn rewards on what you spend, and more.

Having a credit card that doesn’t match your spending style or the way you plan to manage your debt can really add up.  If you find yourself in a position where you are trying to pay off the balance on your card, switching to a lower interest rate or changing to a debt consolidation card can lead to real savings and help you pay down debt faster. 

Save by switching to a card with a lower interest rate

When you signed up for your credit card you may have signed up for an airpoints or cashback card. These types of cards often charge a higher rate of interest but offer perks like airpoints or cashback on what you spend. These cards are a great option if you are confident you can repay the card in full every month. 

If you need to use your card for a larger purchase or find yourself in a position where you need to repay your card balance over a longer period of time the interest can really add up. Switching to a card with a lower interest will help save you money as you repay your debt. 

For example: 

- if you have a $5000 balance on your credit card and you plan to pay back $200 per month, in a perfect world with 0% interest your debt would be repayed in 25 months.  

- On a cashback or airpoints style card with a higher interest rate of 20.95% it would take 34 months to repay the balance and $1627 of your repayments would be interest.

- If you switch to a card with a lower interest rate of 13.9% the balance would be repaid in 30 months and you would only pay $937 in interest. 

Credit card balanceRepay per monthInterest rate (p.a.)Repaid inTotal RepaidAmount of interest
$500020013.9%30 months$5937$937
$500020020.95%34 month$6627$1627

 

Top tip: Payback as much as possible on your card, no matter what the interest rate is. Although it can be tempting to repay lower amounts over a longer period of time the interest will really add up.  

 

In the example above, if you switch to a lower interest rate of 13.95% and pay back $220 per month instead of $200 per month, you will pay back your debt 3 months quicker and save another $103 on interest. 

Switching to a Balance Transfer credit card

A balance transfer is an offer to transfer a balance from your current card to a new one with a different lender but at a much lower interest rate. Balance transfer credit cards often have a lower interest rate for a limited time, sometimes as low as 0%. 

 A balance transfer can be a great opportunity to repay the balance on your card and save on interest in the short term. Balance transfer cards will often switch to a higher rate after the introductory period, so plan to pay back as much as possible during the lower interest period. 

 Top tips for transferring to a balance transfer card

 - The introductory rates can be fantastic  - if you have built up credit card debt you can take advantage of the introductory rate to save on interest in the short term

 - Check out the fees involved – some cards will charge a balance transfer fee, so factor that into your calculations

 - Pay off your card as quickly as possible – take full advantage of the interest-free period and try to pay the debt in full during the introductory offer

 - Think about your spending – what do you need to change about your spending habits to avoid debt building up again?

 - Cut up your other cards – don’t keep using cards you have transferred a balance from!

- Limit your spending – try not the spend on your card while you are paying off the debt

 Money Compare can help you compare New Zealand’s top credit cards instantly side-by-side. Use our Credit Card Comparison Tool to compare credit cards and choose the best credit card for you.

 

Friday, August 31, 2018