Buckle up, fam. A brand new shit show has hit the market: interest free credit cards. Like a soft boy on a dating app who genuinely believes he’s one of the good ones but still manages to accidentally gaslight you into thinking you imagined the connection between you, interest free credit cards are not necessarily as good as they sound.
Information contained in this article is general in nature, does not take into account your personal circumstances and is not to be considered financial advice. This content is not affiliated with or endorsed by any financial institution, and opinions are that of the author only.
What are interest free credit cards?
Interest free credit cards work like a regular credit card in that you essentially borrow money from the bank by spending money on a credit arrangement rather than debiting your bank balance. But, unlike traditional credit cards, instead of charging you interest as a percentage of the balance, you pay a flat monthly fee instead. That monthly fee is the same whether your balance is $1 or $1,000.
The two newest cards on the market in Australia currently are the NEO card from CBA, and the Straight Up card from NAB, both of which have a fixed fee structure that varies depending on your credit limit.
The maximum credit limit on both cards is $3,000, with monthly fees ranging from $10 (NAB) or $12 (CBA) for a $1,000 credit limit, to $20 (NAB) or $22 (CBA) for a $3,000 limit.
Are interest free credit cards worth it?
Good question. Since interest is the devil of paying down debt, on surface value an interest free credit card sounds like a good idea.
Buuuut, I crunched the numbers.
To level the playing field, we need to compare the monthly fee against the annual interest rate of a traditional card. A $20 monthly fee is $240 per year.
So, a $3,000 credit limit for $240 per year. That’s 8%. Not bad, considering most traditional credit cards tend to start around the 11% mark for a low rate card, up to about 21% for more premium cards.
The difference with interest free credit cards is, you pay that $240 per year regardless of what your balance is. So, if you have $500 on that card, you still pay $240 per year. That’s almost 50% of your balance in fees – and this is where it starts to unravel.
I crunched the numbers on the fees on various balances on an interest free credit card with a $3000 limit, to see where things seem to level out.
Assuming a $3000 credit card limit on the NAB Straight Up card:
As you can see, the effective ‘interest rate’ paid in fees doesn’t start to stabilise to levels of regular credit cards until at least half of the credit limit is utilised.
This is problematic for two reasons.
- You’re not really any better off if you reduce the balance (fee wise), and it’s more cost effective to maintain the debt.
- Your credit score could suffer because when you maintain a debt on a card with a low balance your balance to limit ratio (the amount of your credit limit that’s utilised) doesn’t look super hot.
I will note here, though, that it appears that if you do not use the card at all, you don’t pay the fee. In addition, the numbers in this table assume a static balance rather than a fluctuating one.
However, what this does illustrate is if you use the card and pay off the balance before the end of the statement period, you still pay the monthly fee. On a traditional credit card, you wouldn’t pay any interest at all in that situation because the closing balance would be $0.
What about the minimum payments on interest free credit cards?
One thing I did also notice when looking at the NAB Straight Up card is the minimum repayments.
The minimum repayments also appear to be fixed regardless of the balance, whereas on a traditional credit card, the minimum repayment tends to be calculated at about 2-3% of your balance.
Assuming a $3000 credit card limit on the NAB Straight Up card:
On first glance, it might seem like a higher monthly repayment is a good thing. After all, it would encourage you to pay down the debt faster.
But once again, we land at the point that the minimum payment structures are more favourable on higher balances. If you had a $250 balance and could pay the $110 per month comfortably, I’d question the point of having this credit card at all. You’d be paying off the balance within 3 months, and paying $60 in fees in the process. If you want that type of mindful payment deferral, you might be better off with fee-free buy-now-pay-later-programs like Afterpay.
In fairness, the CommBank NEO card uses the same repayment structure as a traditional credit card ($25 or 2%, whichever is higher), so this doesn’t apply to that card.
Why I’m against interest free credit cards
Alright, so we’ve established the fees on low balances equate to an extortionate effective interest rate, so that’s a big no no in my book.
In a nutshell, I don’t think these cards are ethical at all. Separating the fees and the minimum repayments from the balance itself makes higher balances more favourable than lower balances, meaning those caught in a debt and spending cycle are far less likely to get rid of their debt.
Not only is this a big fat shit show for your money mindset and financial confidence, but it’s not a good look on your credit report, either.
While the risks of getting into significant high levels of debt with these cards is mitigated by the maximum limit of $3,000, I can’t see any benefit to these interest free credit cards whatsoever. From my calculations, it looks to me as though any redeeming features of these cards cancel themselves out with the fact that utilisation of said features would be pointless.
For example, avoiding the monthly fees by having the card but not using it – what’s the point?
For example, having a low balance and paying it off quickly with the high minimum monthly repayments – again, what’s the point?
Interest free credit card vs traditional credit card
If you’re considering an interest free credit card, I’d you could look into low rate and/or no annual fee credit cards first, and weigh that up against what you actually want the credit card for.
If you want a credit card for emergencies, you might look at a no annual fee card so that if you don’t run into an emergency, you pay absolutely nothing. Also consider exploring low rate cards so that if you do end up paying for something on the card, the interest charged isn’t too high. You can get cards with rates around 11-12% which may work for you in that situation.
If you want a credit card for secure purchasing (i.e. travel or international transactions) that you’ll pay off straight away, no annual fee cards could be an option. If you’re 100% certain to pay it off each month, the interest rate is less important – though it’s always worth keeping an eye on it in case you ever can’t pay it off. Cards that earn you points or give you perks may also be an option for you in this case. These do tend to have annual fees, but if the perks outweigh the fee and you’re going to pay off the balance each month anyway (therefore avoiding interest), it might work for you.
Ultimately, I believe the only case where an interest free credit card could be a good idea would be if you knew you needed to have the balance maxed out temporarily because of your financial situation.
For example, if you need your car for work and it needs $3000 of repairs that you have no cash flow available for. If you max out the $3000 credit limit, the $20 per month fee would be less than you’d be paying in interest on a card with a regular interest rate. If you then planned to pay down that balance over 6-12 months, you may save money overall compared to if you had it sitting on a traditional card with a 20% interest rate. But, remember, you have to meet the higher monthly repayments. Plus, the lower that balance gets, the less effective the fee structure becomes, so you’d need to calculate the best possible point to pay it off entirely.
Overall, approach interest free credit cards with extreme caution. Punchy marketing and funky names are designed to draw in young people and let you think you’re getting a good deal. Unfortunately in the majority of cases, as they say, the house always wins.