Credit cards

Eight questions to ask yourself before you sign up

Handled correctly, credit cards are a useful way to smooth out the bumps between pay cheques or to help out when you’re short of cash.

Handled badly, they are a leading cause of financial stress. Too many people see them as a magical way to unlock the ATM that wouldn’t give them any money and the minimum repayment is a small hurdle to handle.

Here are some questions to consider before you sign up:

1.  Do you intend to repay the full amount within a month or so?

Great. You’re using your credit card as a way to cover a short-term shortfall. Look for credit cards which offer interest-free days, usually up to 55 days. And make sure you repay the full amount before the deadline, as the calculations of your interest charge are based on the full amount you spent on the day you handed your card over. Pay anything less and you’ll be charged the full interest.

2.  Are you going to carry the debt for more than two months?

You should be using a credit card with the lowest interest rate, and they usually charge an upfront fee. Shop around, and don’t just rely on your bank—it’s so easy online. And use loan calculators to help set your repayments so you’re chipping away at the amount you borrowed, not just covering the interest.

3.  What are you buying with it?

If you’re using a credit card to purchase big items like a new car or a few appliances, then you’re using high-interest debt to pay for items which lose value as soon as they leave the showroom. This is termed bad debt and there are better ways to pay for what your heart desires such as lay-bys, interest-free loans, personal loans and good old-fashioned saving.

4.  When can you repay the whole amount?

Be realistic. If it’s going to take more than a year, there are cheaper and easier ways to pay what you owe. Personal loans tend to be cheaper, and if you already have a good repayment record you’ll be looked at favourably. These loans also define the time you have to repay the whole amount.

5. Do you have a home loan?

You do? Then what are you doing here? Skip to our Reduce what you owe section to find out how much you can save by consolidating your debt.

6. Are you buying bonus points?

It’s nice to be rewarded with free and cheap flights for your loyal patronage. But how cheap has your preferred supplier really been? The fact is, a rewards program is not a real reason to take up a credit card, as tempting as they sound.

7. Ever heard of a debit card?

They look like a credit card and give you all the convenience of one. The main difference is they use your money (with a small buffer) instead of credit. It will help you to stop spending money you don’t have.

8. What is your limit?

It’s amazing how easily people are offered credit limits way beyond theirs. While it might make sense to have a large limit in case of emergency, it makes more sense put a hard and manageable brake on your spending. Our rule of thumb is about six week’s salary. And if you’re asking ‘Is that before or after tax?’ then you probably already know the answer.

Important information

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It’s important to consider your particular circumstances and read the relevant Product Disclosure Statement or Terms and Conditions before deciding what’s right for you. This information hasn’t taken your circumstances into account.

This information is provided by AMP Life Limited. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. All information on this website is subject to change without notice.