Credit card advantages and disadvantages
Thinking about getting a credit card? These pros and cons will help you decide if one fits with your goals.
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Credit cards are handy for shopping, covering unexpected costs and earning rewards. They also influence your credit score (for better or worse) and come with a risk of debt.
So if you're on the fence about credit cards, a simple place to start is by looking at the key advantages and disadvantages – based on your own values.
9 advantages of using a credit card
1. Security
Most credit cards offer 24/7 security services to keep your account safe. All Visa, Mastercard and American Express cards also offer zero liability policies to help you get money back from any fraudulent transactions. It's also easy to cancel a lost card – some even let you put a temporary lock on the account while you look for it.
2. Building credit
Your credit card account details are added to your credit file. If you make payments on time and keep your account in good standing, it will help you build up a good credit score – which could increase your chance of approval for other products such as a car loan or a mortgage.
This sets credit cards apart from debit cards and a lot of buy now pay later services, including Afterpay. If you're trying to choose between a credit card and buy now pay later, the possible impact on your credit history is a key detail to think about.
3. Interest-free days
Most credit cards offer interest-free days on purchases when you pay your full balance by the due date on each statement. This gives you a way to avoid interest charges on your credit card, which also helps keep the costs down.
In 9 years I've never paid credit card interest – here's how
4. Earning points
Reward and frequent flyer credit cards give you a way to earn points on your everyday spending, including supermarket shopping, dining and travel bookings. You can redeem your points for rewards such as flights, hotel stays, gift cards, cashback on your account or even a coffee machine (depending on the rewards program).
Some of these cards also come with big bonus points offers that give you enough to get the rewards you want even faster.
5. Chargebacks – getting your money back
If you have problems with a business that won't give you a refund, you could request a chargeback through your credit card company.
6. Overseas spending
Although currency conversion fees usually apply, you can use your credit card overseas to make purchases in a foreign currency. There are even credit cards that charges $0 fees for international purchases, which could be useful if you often shop at international online stores or have an overseas holiday coming up.
7. Emergency funds
Credit cards can be a financial safety net if you don’t have enough cash or savings to cover any unexpected costs that arise. Just remember that you have to repay everything you owe.
8. Complimentary extras
Credit card features such as travel insurance, purchase protection and extended warranty insurance can save you money and give you peace of mind. Other value-adding features include complimentary flight offers, airline lounge passes and even free wine when you dine.
9. Consolidating and paying off existing debts
Balance transfer credit cards allow you to move existing high-interest debts to a new account with a low or 0% promotional interest rate. This can save you money on interest charges and help you pay down debt faster.
7 disadvantages of using a credit card
1. Interest rates
If you carry a balance from month-to-month, you’ll pay interest charges. Purchase and cash advance interest rates typically range from around 8.99% p.a. to 24.99% p.a. This means you can end up paying hundreds or thousands of dollars in interest charges, and could slow down the time it takes to repay what you owe.
2. Credit damage
Missed credit card repayments and ongoing debts are recorded on your credit file and can impact your chances of getting a loan down the track. See our guide on how to improve your credit file for some tips.
3. Credit card fraud
There are a range of fraud schemes that target credit cards. While you can be compensated for illegal transactions on your account, dealing with credit card fraud can still be a time-consuming and stressful experience.
4. Cash advance costs
Financial institutions make it very expensive to use your credit card to get cash out or make other “cash equivalent” transactions (such as buying foreign currency or gambling). Using a credit card for a cash withdrawal will attract a cash advance fee worth around 3% of the total transaction amount. It also typically attracts an interest rate of 19-24% right away.
5. Annual fees
While you can often get debit cards without annual fees, most credit cards have them. These can cost as little as $20 per year or as much as $1,450 depending on the card that you choose. Generally, the more perks you want, the higher the annual fee. If you want to avoid this charge, you can consider a no annual fee credit card – but make sure you look at all the other features to help find a card that works for you.
6. Credit card surcharges
Businesses sometimes apply a surcharge when you pay with a credit card. For Mastercard and Visa products, this fee is usually 0.5-1.5% of the total transaction cost, while for Amex cards it could be closer to 2%. Whatever the case, this is an extra cost for the convenience of paying with plastic.
7. Other fees
Depending on your card, you could be charged fees when you miss a payment, fees if you spend past your credit limit, fees for overseas transactions, balance transfer fees and even some rewards programs fees. If you carry a balance or don’t have access to interest-free days, there’s also a good chance interest will be applied to these charges.
Should I use a credit card? What to look at first.
Credit cards are suited to some people, but not others. As well as the pros and cons, you may like to look at the following factors to help decide if a credit card is right for you.
A credit card may suit you if you:
- Are at least 18 years of age
- Are an Australian citizen, permanent resident or hold an eligible temporary visa
- Have a regular source of income
- Regularly pay your bills on time
- Want to keep certain transactions separate from your everyday bank account
- Are keen to earn rewards for your spending
- Need more flexible cash flow
- Can afford to pay a little extra for the convenience
A credit card may not suit you if you:
- Don’t meet the age or residency requirements
- Often struggle to pay bills on time
- Don’t have a regular source of income
- Can’t afford annual fees or interest charges
- Have bad credit
- Are happy to just use a debit card
When you’re thinking about getting a credit card, it’s important to consider the benefits and disadvantages they offer based on your own circumstances. This helps you decide if a card is right for you – and what type of card to choose.
Pictures: Shutterstock
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