In this post, I intend to explain some of the technical terms that are often thrown around in the world of Credit Cards. Feel free to leave comments to ask any questions!
Interest Free Days
Interest free days, as the name suggests, is the number of days that you have on your Credit Card where you do not need to pay interest on your purchases. In Australia, the most common number of interest free days is 55 days.
Note that the wording is typically “up to” 55 days. The reason for this particular wording is that you usually have one specific date every month that your Credit Card Bill is due.
- Assume your Credit Card is billed to you every month. For the period 1 January – 31 January, your “January statement” is due on 14 February.
- Any purchases you made on 1 January, there will be no interest payable on these purchases until after the due date of 14 February. 14 February is 55 days after 1 January.
- For any purchases made on 2 January, there will be no interest payable on these purchases until after the due date of 14 February. 14 February is 54 days after 2 January.
With this example above, do you see why it is worded as up to 55 days?
This refers to the maximum amount of money owing (i.e. Balance) you can accumulate within a billing period/cycle. This can generally range anywhere from $500 to ~$50000.
Billing Period/Cycle (or Statement Period)
This refers to the “cycle” in which your accumulated expenses are calculated into one single bill.
You could have a billing cycle where all purchases made on your Credit Card between March 16 and April 15 are compiled into one bill for you. Generally speaking, this will be consistent. That is, your billing cycle commences on the 16th of the first month before rolling into the 15th of the second month.
This is only applicable if you already have Credit Card with a balance owing. Personally, I am not overly familiar with the nuances of Balance Transfers because I do not use them at all. As mentioned in my first sentence, it is only applicable if you have a balance owing and I never pay interest/late fees on my Credit Cards and therefore never have ongoing Credit Card debt.
A Balance Transfer is when you are being offered to pay off your Credit Card debt at a lower interest rate than the usual interest rate. Whilst in theory, this sounds good, there are a few reasons why I am not a fan of Balance Transfers:
- Using a Balance Transfer usually means you can’t use your Credit Card without incurring immediate interest charges
- This effectively means you’re simply stowing away an amount of debt you have and “locking it” at a lower interest rate.
With the above being said, it is not bad – it simply doesn’t align with my goals of using Credit Cards, which is simply to use them to earn points, take advantage of insurances, Credit Card promotions/offers. Generally speaking, you either take advantage of Credit Cards in the form of Balance Transfers or Points. It is not easy to take advantage of a Credit Card in the form of both Balance Transfers and points.
Things to be aware of with Balance Transfers:
- Establishment fees (often 1% of the amount owing)
- Ongoing Interest Rate during the duration of the promotion (usually somewhere between 0-3% – the lower the better)
- Interest Rates after the period is over (usually reverts to the standard Interest Rate of the Credit Card, which is often >10%)
- Annual Fee of the Credit Card – be aware that this may or may not be waived as part of their Balance Transfer promotion
- Is there a maximum balance you can transfer? Sometimes this is 80% of your approved Credit Limit
The American Express Explorer at the time of writing (March 20, 2017) has a Balance Transfer promotion offering 0% for the first 12 months. The establishment fee is 1%.
This is like a membership fee, payable in advance on an annual basis. Sometimes cards are offered with the first year waived or at a reduced rate.
Generally speaking, the higher your expenditure, the more likely you are able to reasonably expect to be able to recoup annual fees through your standard expenditure.
Banks/Financial Institutions will also sometimes waive annual fees when asked by customers, but usually under certain circumstances. One common example is by having a home loan with a bank. A bank with which you hold a home loan will normally offer you their premium tier of Credit Cards at no annual fee.
Other examples include:
- Calling American Express and expressing interest in cancelling your Credit Card. Sometimes they will offer an annual fee waiver, or more commonly a form of “Points Retention” (e.g. we’ll give you 20000 points if you stay).
- Having high expenditure on a card – they are more likely to be willing to waive annual fees if they can see you’ve consistently put a good volume of transactions through your card
The American Express Explorer has a $395 annual fee
These are points you are able to accrue at a rate of usually X per $. Some cards offer category based bonuses where you earn additional points at certain merchants.
Standard Earn Rate Example
The American Express Explorer offers a standard earn rate of 2 Membership Rewards Gateway points per dollar on everything, except for any transaction classified as “Government” (e.g. Australian Tax Office, Australian Post)
Category Based Earn Rate Example
The American Express Platinum Edge offers Membership Rewards Ascent points as follows:
- 3 points/$ at major supermarkets
- 2 points/$ at major petrol stations
- 1 point/$ on everything else
- 0.5 points/$ for any transaction classified as “Government” (e.g. Australian Tax Office, Australian Post) or Utilies (water/gas/electricity)
Cash Advance Fee
A cash advance fee is typically charged onto a Credit Card when you make a withdrawal from an ATM to obtain cash from your Credit Card. This fee usually applies regardless of whether your Credit Card is in a positive or negative balance, and is typically a fixed dollar amount.
Other situations in which a cash advance fee is typically applied is if you use your Credit Card to top up a gambling/betting account, so you can’t simply top up your account, obtain Rewards points and cash out immediately.
Cash Advances typically do not earn you Rewards points.
Interest Rates of Credit Cards are the same as any other loan you would have.
- Typically quoted as an annual rate
- For Credit Cards, this is usually upwards of 15% p.a.
- Interest is usually charged as soon as the full balance (amount owing) is not paid off on a Credit Card by the Due Date
- Not to be confused with a “late fee”
- It is advisable in most situations to not use a Credit Card if you are unable to repay the balance off in full every month. Any benefits you may realise from the card are effectively completely eroded by having to pay interest (and late fees) on Credit Cards.
A late fee is charged when the “Minimum Payment” amount has not been paid by the Due Date
The Minimum Payment is the minimum amount that must be paid off on your card to avoid:
- A late fee
- A “late mark”
It is important to note that this does not mean you avoid paying interest. To avoid paying interest, you must pay off the balance in full