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 getting a credit card, a good place to start is by looking at the advantages and disadvantages – based on your own values.
1. 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. In fact, Finder research shows 41% of Australians got their most recent credit card for emergencies, making it the most common reason. Just remember that you have to repay everything you owe.
Using a credit card means it's not the money in your bank account that could be affected by security issues. All Visa, Mastercard and American Express cards have zero liability policies to help you get money back from fraudulent transactions. Most credit cards also offer 24/7 security services and some even let you put a temporary lock on the account.
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.
4. Building credit
Your credit card account details are added to your credit report. If you make payments on time and keep your account in good standing, it helps you build up a good credit score – which can increase your chance of approval for other loans.
This sets credit cards apart from debit cards and a lot of buy now pay later services, including Afterpay. So 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.
5. 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 you can use to get the rewards you want even faster.
6. Chargebacks – getting your money back
If you have problems with a business that won't give you a refund, you can request a chargeback through your credit card company.
7. 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. The wide acceptance of credit cards also make them an appealing choice for travel.
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 and airline lounge passes.
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.
1. Interest rates
If you carry a balance from month-to-month, you’ll pay interest charges. Interest rates for purchases typically range from around 8.99% p.a. to 26.99% p.a. This means you can end up paying hundreds or thousands of dollars in interest charges, and could take longer to repay what you owe.
2. Credit history damage
Missed credit card repayments are recorded on your credit report and can impact your chances of getting a loan down the track. If you're planning to apply for a home loan, your credit card limit also affects how much you can borrow and can impact your eligibility.
3. Credit card surcharges
Some businesses apply a surcharge when you pay by card – and it can be higher for credit cards than debit cards. For Mastercard and Visa credit cards, 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 cost, it means you'll pay for the convenience of using a card.
4. Annual fees
Unlike debit cards, most credit cards charge an annual account fee. These can cost as little as $25 per year or as much as $1,450 depending on the card 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.
5. 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 19-29% right away.
6. Credit card fraud
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.
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.
Do you have credit card debt?
Australians have $18.1 billion of credit card debt accruing interest according to Reserve Bank of Australia data for September. Individually, the average Australian has $1,157 of credit card debt, according to October data from our consumer sentiment tracker. It peaked in January ($1,967) and has slowly been declining throughout the year.
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 be suitable 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 and pay your bills on time
- Want to keep certain transactions separate from your everyday bank account
- Want to earn rewards for your spending
- Need more flexible cash flow
- Can afford to pay a little extra for the convenience
A credit card might not be suitable 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
- Plan to apply for a home loan soon
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.
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