Fixed repayment credit cards are a new innovation in the Australian credit card market. Fixed repayment credit cards are worth considering for people who want the flexibility of a credit card, with the discipline of a personal loan.
What is a fixed repayment option credit card?
Fixed repayment option credit cards operate in just the same way as a normal standard credit card. You can make purchases and you have a certain number of interest-free days (usually up to 55) to repay the purchases before the debt begins attracting interest.
However a fixed repayment option credit card has an added feature. If you want to make a large purchase - over $500 - that will not be able to repaid within the interest free days, you can opt for a fixed repayment deal. Or you can nominate a purchase you have already made for fixed repayments over a fixed length of time.
What are the advantages of a fixed repayment credit card?
When you nominate a purchase for a fixed repayment deal, you then get charged a lower rate of interest. You are agreeing to a repayment schedule over 12, 24 or 36 months and in return you pay less in extra interest charges. That makes a fixed repayment credit card competitive with a personal loan for a large purchase.
Generally credit cards work best for making small transactions and paying them off quickly. Fixed repayment deals can make a credit card a worthwhile option for big purchases. Previously, making a big purchase on a credit card could be the start of an expensive credit card debt cycle.
What is the credit card debt cycle?
The potential problem with credit cards is always that the minimum monthly repayments - usually about two per cent of the debt - are very low. A small credit card debt of, say, $1,000, will take many years to repay at the monthly minimum repayments of $20 per month.
Meanwhile the $1,000 debt is attracting interest at a rate of perhaps 17 per cent per annum (the average credit card interest rate). This makes the debt harder to repay.
Making new purchases on the credit card also adds to the debt and makes the task of repaying the entire amount even harder. This is the credit card debt cycle.
Fixed repayment credit card vs personal loan
A personal loan is generally considered the best, cheapest and safest way to finance a large one-off consumer purchase. A personal loan has set repayments each week, fortnight or month until the entire debt is repaid. However a personal loan usually doesn't let you spend the money you have repaid. There is no flexibility at all.
A fixed repayment credit card allows the consumer to set their own, fixed, monthly repayments while enjoying the freedom of a credit card. This helps with budgeting and can help consumers maintain a good credit history.
Which credit cards offer a fixed repayment option?
Virgin Money offers a fixed repayment option on Virgin Money credit cards. Find out more about Virgin Money's No Annual Fee Visa card here.
Citibank also offers Fixed Payment Option for credit card customers. Find out more about Citibank's Citi Simplicity Low Rate Visa credit card here.
Both Virgin and Citibank let the card holder nominate a large purchase or purchases (over $500) they have made using their credit card for set repayments over a set number of months (12, 24 or 36 months). Citibank and Virgin also allow cardholders to nominate a number of purchases they have made for the fixed repayment option, or request a cheque for an amount over $500 which will be repaid over one, two or three years.
Compare credit cards with InfoChoice today.