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Why “no interest” credit cards are really “monthly fee” cards

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How to use this new credit option to your advantage.

This week, both NAB and CommBank launched "no interest credit cards". It's an interesting new approach to offering credit, but that name doesn't tell the whole story.

A regular credit card charges interest on the outstanding balance each month. If you pay off the card in full each month, the main cost of the card will be the annual fee. This varies widely. There are cards with no annual fee, and there are also frequent flyer credit cards with lots of perks that charge annual fees of $400 or more.

These new cards (with fancy names such as NAB StraightUp and CommBank Neo) take a different approach. There isn't an interest charge and there's no annual fee, but you do pay a monthly fee for having the card. The higher the credit limit on the card, the higher the fee. Just like a standard credit card, you also have to make a minimum payment each month.

Why the new approach? The main reason is to compete with buy now pay later services such as Afterpay and zipPay, which have proven extremely popular. With these services, you pay off the balance of any purchase in a series of instalments. Provided you make those payments regularly, there's no additional cost. No interest cards emulate that approach, but with the advantage of being a credit card and thus usable almost everywhere.

Will I save money with a "no interest" card?

As a savvy consumer, the key to using a "no interest" card is to realise that "no interest" does not equal "no cost". That monthly fee really matters, which is why I'm already thinking of these as "no interest monthly fee" credit cards.

CommBank and NAB have taken similar approaches. Let's suppose you want a card with a $1,000 limit. NAB StraightUp will charge you $10 every month you have a balance to pay off. CommBank Neo will charge you $12. (There's no fee if you haven't used the card and have a $0 balance.)

There are advantages to buy now pay later and to no interest credit cards. One big benefit of credit cards is that they're accepted by pretty much all stores. You can only use buy now pay later if a retailer has it available.

Using a credit card can also help improve your credit score, something that won't happen with a buy now pay later service. You can keep track of your credit score for free with the Finder app.

The downside for no interest credit cards is that monthly fee. If you make all your payments on time with Afterpay, it doesn't cost anything. Even if you pay off your balance every month with a no interest card, you'll still have to pay the monthly fee because you used the card.

The StraightUp will cost at least $120 a year if you use the card every month. The Neo will run to $144 a year with monthly use. If you're disciplined about your payments, a card with no annual fee will generally be a cheaper alternative.

As with any credit decision, you need to understand your own spending patterns carefully to make sure you don't end up paying more than you can really afford. That takes a little effort, but it will save you lots in the long run.

Looking for a low-cost credit card? Check out $0 annual fee cards and cards with 0% purchase rates.

Angus Kidman's Findings column looks at new developments and research that help you save money, make wise decisions and enjoy your life more.

Picture: Getty Images

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