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Credit card advantages and disadvantages
Decide if a credit card is right for you with our comprehensive list of pros and cons.
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Credit cards can be a convenient way to manage your finances (or get rewards), but they can also be expensive and risky. If you’re deciding whether or not a credit card is right for you, here are some of the main advantages and disadvantages you can weigh up to make your decision.
9 advantages of using a credit card
Some of the perks of paying with plastic include:
- Security. A credit card can quickly be cancelled if you lose your wallet, and some cards give you the option of temporarily locking your card while you look for it. Visa, Mastercard and American Express cards also offer zero liability policies to help you get money back from any fraudulent transactions. On top of that, many cards offer 24/7 fraud monitoring services.
- Build your credit score. Your credit card account repayment history make up a key part of your credit file. If you keep your account in good standing, this information will help you build up a good credit score, which could increase your chances of approval for other products such as car loans or a mortgage. This sets credit cards apart from debit cards, as well as most buy now pay later services, including Afterpay. If you're trying to choose between a credit card and buy now pay later, Finder also has a guide that compares them.
- Interest-free days. If you pay your balance in full before the statement period ends, you can be rewarded with interest-free days on future purchases for a set period.
- Earn points. Rewards and frequent flyer credit cards allow you to earn reward points on every dollar you spend on eligible purchases, such as groceries and fuel. Rewards credit cards let you earn reward points to redeem with the bank’s rewards programs for perks including flights with partner airlines, products from the rewards store or cashback. Frequent flyer credit cards, on the other hand, let you earn points towards flights, upgrades and more with specific airline loyalty programs.
- You can request a chargeback if you’re unhappy with a product or service. You can request a chargeback through your credit card company if you have a dispute with a merchant, either in-store or online.
- Spend overseas. 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.
- 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.
- 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.
- Consolidate and pay 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
The downsides of spending with a credit card include:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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?
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
If you’re thinking about getting a credit card, it’s important to consider the benefits and disadvantages they offer based on your own circumstances. As well as helping you decide whether a credit card is right for you, this process can narrow down the range of cards you compare so that you can find an option that works for you.
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