By Effie Zahos
Money magazine, October edition
But it’s the card costs that count, says Effie Zahos
Is there such a thing as credit card status? Unless the card is made of titanium – Amex’s Centurion Card is by invitation only and requires a $5000 joining fee along with a $2500 annual fee – I personally wouldn’t bat an eyelid if somebody pulled out a gold or even platinum card.
In the ’80s, the colour of your card may have flagged your financial success but today all it confirms is that you earn at least the average wage and you’re willing to pay up to four times more than the average standard reward card annual fee.
What’s more interesting to note is that banks are shifting customers to platinum cards. A quick search on Canstar’s database shows out of the top 20 balance-transfer deals, 16 of them are offered through platinum cards – although in the early days banks used their most competitive balance transfer offers for their low-interest cards to attract customers.
It’s also an interesting move in light of the credit card reforms now operating.
Prior to July 2012, if you took out a balance-transfer offer and made a purchase during the promotional offer, any repayments made during this time would go towards reducing your debt on the promotional rate first, rather than the debt on the more expensive purchase rate – an ideal setting for balance-transfer offers even on the less expensive cards.
This is not the case now, as banks are required to direct your credit card payments to the most expensive part of your card debt first. The reforms are making balance-transfer offers less lucrative for banks and Jeremy Cabral of creditcardfinder.com.au says there’s a very good reason why balance-transfer deals are popping up on premium cards.
“The banks make more money on the interchange fees on platinum cards than they do on standard cards,” he says. “Annual fees are much higher and at the end of the balance transfer period, the rate reverts to the purchase rate, which on platinum cards can hover at up to 20%.” While cardholders and merchants don’t typically see interchange fees, they can have an impact on the fees that cardholders and merchants pay.
An interchange fee is the fee financial institutions pay to one another. Every time you use your credit card, a fee is paid by the merchant’s financial institution to your financial institution for the privilege of payment. If you pay with a premium or platinum card your institution would earn around 1% of the value of the transaction in interchange fees, versus around 0.4% if you used a standard credit card.
“The higher interchange fee is passed on to the merchant and then to yourself in the form of a merchant service fee and credit card surcharge fee,” says Cabral.
You have to ask yourself: Do the extra benefits and features offered by platinum cards justify their extra cost?
According to the Reserve Bank, it now takes $6000 more to get the same value out of a rewards program than it did in 2003. Compounding the hit, annual fees have jumped 20% in recent years.
Platinum cards, or any cards, only work if you’re paying less than what you get out of them – whether that be in terms of convenience or rewards.
While platinum cards are noted for the many benefits they offer – including refund protection, purchase protection, travel insurance and concierge – no two cards are the same. Be sure to do your research before settling on one that simply offers the best balance transfer rate.
Money Focus with Heidi Armstrong
Are you a first-home buyer DINK (double income no kids)? If so, the time to get ahead on your home loan is now. When kids come along, life gets a lot more expensive. Extra repayments on your home loan have the most benefit the sooner you can do it. On a $350,000 home loan at 6% repaid over a 30-year term, an extra $5000 at year one will save you over $22,514 in interest during the life of the loan. If you pay this $5000 off at the end of year five, you will save just $16,805 in interest.
When kids come along, the opportunity to find spare cash to pay off your home loan is limited. So my advice is to get excited about the massive savings you can achieve if you pay extra off your mortgage now. Most lenders’ websites offer online calculators that can help.
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