If you think you’re getting a good deal from your current credit-card provider, think again.
Chances are you’re paying too much in interest or fees, and getting fewer rewards than you realize, a new report suggests. Even if you’re getting back more in rewards than you pay in interest and fees — you’re almost certainly missing out on even better deals, it adds.
The report was conducted by the Reserve Bank of Australia, their central bank, based on a detailed annual survey of consumers and their finances in the country. “Most cardholders would be better off if they held a different credit card,” concludes the report, “Consumer Credit Card Choice: Costs, Benefits & Behavioral Biases.” It adds that despite this, “only a relatively small number of cardholders switch cards.”
Card experts could not immediately identify comparable U.S. research, but the Australian report casts light on common card holders’ mistakes that is more generally applicable to comparable markets including the U.S.
The Australian central bank had access to a unique data set, drawn from its annual survey of consumer payments. Analyst Mary-Alice Doyle ran numbers not only on what consumers were paying for their cards and what they were getting back, but also what they could have gotten from other, better cards.
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How good (or bad) a deal are people getting?
Her conclusion: Most people were getting a worse deal than they realized — and they were leaving money on the table. The typical borrower would be about $85 (in U.S. dollars) a year better off if they used another card, and many could see gains of $200 or more.
Meanwhile, the latest study found, the average credit-card holders’ net benefit was “not significantly different from zero.”
About 30% of borrowers were clearly losing money on their cards, paying more in interest and fees than they got back in any rewards, but only about a third of those actually realized they were losing money.
And while those with bad credit and bad scores will face difficulties switching cards, just 47% of those who were losing money even looked into trying to switch, the study found.
The way we get treated by credit-card issuers makes little sense. It’s a competitive market. There are cards galore. And making comparisons between cards is easy online, not only here at MarketWatch but also at Bankrate.com, CreditCards.com, WalletHub and NerdWallet.
Also see: Citi prepares to relaunch its top credit card with focus on dining and travel rewards
Do people in the U.S. like to switch credit cards?
Millions of Americans may be reluctant to change their credit card. Some 19% say they’ve stuck with one card for at least 10 years, while another 15% say they never change their primary card, according to a separate 2016 survey by CreditCards.com. That’s obviously bad news if they’re sticking with a card that’s costing them money.
What’s more, the U.S. borrower experience may be worse because lenders here face fewer regulations. Card issuers in Australia, for example, are not allowed to send out unsolicited pre-approved cards or credit extensions.
There’s a lot of money at stake in the U.S. where outstanding revolving debt, which is often categorized as credit-card debt, exceeds $1 trillion.To put that figure in context: The entire student-loan debt burden in the U.S. currently tops $1.5 trillion.
The average interest rate on U.S. credit card balances has also jumped to a new record high of 17.07%, according to CreditCards.com. To put that in context, that money is only costing the banks around 6% a year — based on 2% federal funds rates, and about 4% in charge-offs for bad debts.
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Why are so many people reluctant to change cards?
Blame some standard “cognitive biases,” argue behavioral finance experts. Some of us are too optimistic: We underestimate the amount we are going to spend on the card and, therefore, the risk of carrying a balance and paying interest. Some are tricked by the complexity of the offers into signing up for deals they either don’t understand, or of which they can make little use.
Doyle says many of us track our rewards points, but forget about the annual fee, which shows up on a statement once a year. In other words, we all suffer from too little “bandwidth” in terms of the time, attention and energy we can devote to checking cards.
There are some other issues, too. Many borrowers are reluctant to close a credit card account because it is likely to ding their credit score.
Borrowers should contact their card issuer to see if they will waive the fee — or move their account to a different, zero-fee card, said Ted Rossman, analyst at CreditCards.com. Make sure your own habits fit the card. Those carrying a balance, for instance, should probably look at low- or zero-interest cards rather than cards offering loyalty points.
Wise borrowers could also embrace the ancient Greek dictum “know thyself.” Experts say there’s no point juggling six cards — one for the supermarket, one for the gas station and so on — if you’re too busy to keep track, or you’re the kind of person that rarely gets round to reading your statements.
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Source : MTV
