Happy New Year everyone!
Do you have a ‘Christmas spending’ hangover? You might be tempted by the new interest-free credit cards that are available from CBA and NAB. But wait…are they any good? What are the fees? What’s the catch?!
With the creation of Buy Now Pay Later (BNPL) services such as AfterPay, Zip Pay and, Bundle etc, banks have noticed that credit cards have been shunned by Aussies. Over half a million credit card accounts have been closed in the last 12 months alone which is the millions of dollars of short-term lending that banks are missing out on.
Many Aussies are ditching credit cards which are considered old-fashioned, old technology and just plain old boring in place of BNPL. The main difference is with AfterPay and Zip Pay and the like, there are some fees attached if you miss a payment, however, there are no interest costs, whereas with traditional credit cards there are very high interest rates attached. Usually 20% – 24% p.a. which kicks in after an interest-free period (and even used to be backdated until a couple of years ago). Credit card rates are still very high. Compared to a personal loan or a car loan, credit card interest rates are double at least. That’s because short-term lending is a convenience so the interest rates are high.
People are favouring BNPL because there’s no interest, but that doesn’t mean they are fee-free.
Banks have been trying to come up with a way to recoup some of their lost market share. Two banks Commonwealth Bank (CBA) and National Australia Bank (NAB) have introduced products called interest-free Credit Cards. The name sounds interesting but are they any good? Here’s my honest review of the CBA Neo Card and the NAB Straight Up Card.
How does an interest-free credit card work?
There is no interest attached to these credit cards, just a monthly fee. There are three limits that you can select from – $1,000, $2,000 or $3,000. As these cards are offered by banks they fall under the Australian Responsible Lending laws so you need to apply and then the banks will grant you a card based on whether or not you can afford to repay them, whereas with AfterPay and Zip Pay there are no responsible lending criteria because they are not loans as such so they get away with a little bit more in the marketplace.
Not paying interest on purchases could save you 20% – 24% p.a. and there are no late payment fees either whereas with AfterPay and Zip Pay, there are late fees. So on face value, you might think the cards sound pretty good so far compared to a traditional credit card, however, the limit is quite low for the fees that are attached. Remember, there are always fee with everything that banks offer and even with AfterPay, Zip Pay and Bundle – companies are here to make money after all! So don’t ever think that these companies are here out of the kindness of their hearts, they’re here to make a profit. Somebody is getting paid always so it’s important to drill down and check what are the fees in terms of fees!
The CBA and NAB cards have a monthly fee that ranges from $10 – $20 per month depending on which company you go with. The NAB fees are cheaper than the CBA fees by about $2 – $3 per month.
As a comparison, the NAB Straight Up Card with a $1,000 credit limit will have a $10 per month fee but with the CBA Neo Card, you’ll pay a $12 fee. CBA is only $2 more but as a percentage, it’s 20%! So the NAB card is already cheaper from that point of view.
So let’s keep reviewing the NAB Straight Up Card and forget the CBA Neo Card.
- $1,000 credit limit = repayments of $35 per month (including a $10 per month fee)
- $2,000 credit limit = repayments of $75 per month (including a $15 per month fee)
- $3,000 credit limit = repayments of $110 per month (including a $20 per month fee)
Let’s investigate those repayments and fees further because repayments of $20 per month for $3,000 of borrowings may not sound like much but it does add up. Also, you need to be aware of just making minimum repayments. Lenders just love to offer minimum repayments but that never repays the total balance in full (quickly), it usually takes a few years! Careful! That’s when fees and charges can add up.
As an example, let’s assume you take out a NAB Straight Up Card with a $3,000 credit limit that you spend. You’ll want to repay that quick smart to keep the fees low, but, if you only repay the minimum of $110 per month (including a $20 per month fee) after one year you would have only repaid $1,320, not $3,000! And $240 of that $1,320 repayment will have gone to the bank as their fee and not even made a dent in your debt.
If you only make the minimum repayment it will take you much longer than one year to repay that debt. It will take you over 4 years to repay a $3,000 debt. So, never just make minimum payments! The longer you hold the debt the more money the bank makes. That’s what banks want. It’s how they make their money.
Say, on the other hand, you want to be smarter than the average person and you want to repay the debt quicker – within 1 year. You will have to make higher repayments. You’ll need to repay $250 per month ($3,000 / 12 months). Plus, you’ve got to add on the $20 per month fee. This means you need to make repayments of $270 per month to clear a $3,000 card debt in 1 year.
After 1 year, the $20 per month fee adds up to $240 in fees. That equates to an 8% fee! So whilst you’re not paying high interest costs (20% – 24% p.a.) an 8% fee is still relatively high for a $3,000 debt. You can get car loans and personal loans with lower rates.
Not paying any interest is great but the bank fees still add up.
How does that compare with BNPL?
Let’s compare the interest-free card to AfterPay as an example, because AfterPay is one of the biggest BNPL companies and probably the most recognisable.
With AfterPay there is a maximum borrowing limit of up to $1,500 which is much less than the $3,000 maximum offered by the NAB Straight Up Card. You can spend more with interest-free credit cards because they are offered by a bank. They are different products.
With AfterPay you can only spend up to a maximum of $1,000 in one transaction, so to keep things simple, let’s compared a $1,000 AfterPay debt to a $1,000 NAB Straight Up Card.
With AfterPay you will need to repay over 4 instalments done fortnightly = $250 per fortnight to repay $1,000. You don’t pay any fees with AfterPay unless you miss a repayment, then you will be charged a $10 fee and then another $7 fee ($17 total) if it remains unpaid for 14 days, whereas with the NAB card, you could repay as much or as little as you want as long as it’s above the minimum ($35 per month).
If you want to repay the NAB debt in the same amount of time as an AfterPay debt (4 fortnights or 2 months) you would need to repay $250 per fortnight, plus a bank fee of $10 per month ($20 in total for 2 months). A $20 bank fee on a $1,000 debt equates to 2% and is higher than 0% with AfterPay (so long as you don’t miss a repayment).
Therefore, the interest-free credit card is more expensive than AfterPay, however, don’t forget that the amount you borrow on an interest-free credit card will make a big difference. That’s because the interest-free credit card fees are fixed and therefore, the more you borrow, the lower the monthly fees are as a percentage. The less you borrow the higher the fees are as a percentage.
i.e. If you repay a $1,000 NAB card debt over 12 months (instead of 2), you’ll pay the $10 per month fee the entire time ($120 total fees). As a percentage, that is 12%!
If your card has a zero balance for the entire monthly statement you won’t pay any fees, but if you make just one purchase on the card and pay the entire monthly fee.
The fees of the interest-free cards are quite expensive, especially for small purchases.
Some people like to have a credit card for emergencies however, you can negate having to worry about all of these fees and repayments if you have some emergency savings stashed away.
A word of warning…
Although I compared the fees of AfterPay and believe it could be cheaper than the new interest-free credit cards, in no way shape or form do I promote using BNPL. I think for the time it takes for
people to juggle AfterPay repayments, especially if you have several purchase repayments on the go at one time (you can have up to 3), juggling this in your day-to-day money life and worrying about it, you can save yourself a lot of time and effort by thinking ahead instead of repaying something from the past.
All of your worries can be negated by having some cash stashed away for emergencies or unexpected purchases.
If you can repay $250 per fortnight for a $1,000 AfterPay debt, you could instead choose to save that money and put it away for future spending. Just wait a fortnight or two before shopping to let your savings build up a little. It is a simple as that.
Neither BNPL and interest-free credit cards don’t have a place in my finances that’s for sure. Yes, they are better than traditional credit cards but I don’t think any of us need them.
Click here to watch my full review video!
Disclaimer: This information provided is general in nature. It is based on the knowledge and experiences of the author and not intended to be taken as financial advice. It does not take into account the objectives, financial situation or needs of you or any other particular person. You need to consider your financial situation and needs before making any decisions based on the information. You may have to modify the information and do further research, for it to suit your personal financial situation. Therefore, before acting on the information, it is recommended that you consider its appropriateness to your circumstances or consult a financial adviser, tax advisers or legal professional to assist you in doing this