Beware COVID-19’s credit card trap as interest rates stay sky high
Interest rates charged on credit cards have barely moved this year despite rate cuts elsewhere and virus-related assistance packages. Here’s why it’s a potential trap.
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Credit card leniency offered by banks and other lenders during COVID-19 can potentially send people into a debt spiral.
Refunds of late fees, payment deferral options and lower monthly charges have been announced by some lenders, but they still charge sky-high interest rates.
Major banks’ credit card interest – around 20 per cent – is the same as it was in early February, although Westpac won’t charge interest on its new credit card support package.
Consumer finance specialist Lisa Montgomery said most credit card customers were not getting an interest break.
“A lot of people might be thinking there’s some kind of free lunch – there isn’t,” she said.
“These measures that banks and other lenders are taking are for people in genuine need. If you are looking to take advantage of circumstance, there is no upside. The same amount of interest will be charged to you.”
A $10,000 credit card debt can balloon beyond $12,000 in a year if unpaid.
Many people use credit cards to collect reward points, but millions are now in limbo after the popular Velocity program put redemptions on hold last week amid Virgin’s voluntary administration and surging demand for rewards such as gift cards and electronic goods.
Ms Montgomery said cardholders who were struggling should contact their financial institution, while others could use the current low-spending environment to slash their debt through extra repayments and searching for a better deal online.
“If you are still gainfully employed you should be looking to reduce that debt while you can,” she said.
A recent survey by finance website money.com.au found one-third of Australians said it would take at least a year to repay their credit card debts – before the impact of coronavirus.
Almost two out of five have card debts above $10,000, it found, and 13 per cent don’t think they will ever pay it off.
Financial adviser and money.com.au spokeswoman Helen Baker said cranking up credit card debt in this uncertain time would cause “an enormous amount of stress” if your
job situation worsened,
“Credit cards work fine as long as you can pay it off every month and you have got work,” Ms Baker said.
Ms Baker said people with high card debt could consider consolidating it into a lower-interest loan or using a zero-interest balance transfer card – but warned some lenders were hesitant to offer these to workers in vulnerable industries such as retail or travel.
“It really is about trying to live within your means right now,” she said.
Originally published as Beware COVID-19’s credit card trap as interest rates stay sky high