Credit cards can give easy access to ready money. But they come with cons as well as pros and it pays to understand what you’re getting into. We cover some of the important things to consider - whether you’re already a credit card holder or considering a new plastic card.
What is a credit card?
A credit card allows you to borrow money to spend within a defined interest-free period—usually between 25 and 55 days. If you don’t repay the debt you’ve accumulated within the month, you’re likely to be charged very high rates of interest (maybe 20%). This interest can also attract interest and blow out your balance over time.
In Australia we collectively hold over 16 million credit cards, with over 70% of Australian adults having at least one credit card1.
When you apply for a credit card you’ll generally receive approval to borrow a maximum amount: your credit limit. Just as with any type of loan, a lender will take into account a range of factors including the amount you earn and your other financial obligations.
Lenders will generally aim to assess your financial capacity to repay the loan. Be aware that any credit card debt you take on may affect your financial capacity when applying for any other loan, such as a home loan.
What fees can be charged?
You may have the convenience of not carrying around large amounts of cash, but with a credit card you could fall into debt if you’re not careful about your spending. Some of the charges that can accumulate include:
- interest on any amount you haven’t repaid in full before the end of your statement period
- an annual fee which can be charged just for having your credit card account (and can earn interest too)
- fees that are technically charged only to merchants, although some merchants pass the charges on at the point of sale if you don’t pay in cash or by EFTPOS from a savings account
- other fees, like late payment fees and penalties for spending over your credit limit
- cash advance fees which may be charged if you withdraw cash from your credit card account. No interest-free period applies to a cash advance so you’ll pay interest from day one
- membership fees that a rewards provider may charge if you have a rewards-linked credit card.
Savings plus rewards
When you spend using a credit card you have the potential to benefit from keeping your money in your savings account and earning credit interest. But remember, you’d have to repay your credit card balance in full within the interest-free period—otherwise, you’ll be worse off.
If you do use a credit card, you might choose to join a rewards program and earn extras like airline points or gift cards once your points accrue.
Is a credit card for me?
A credit card will only make financial sense if you can repay the balance owing within the interest-free period. Otherwise, you’ll simply be racking up debt. When considering a credit card, you need to weigh up the benefits against the fees and charges and your own financial diligence.
Be mindful of the number of times you apply for a credit card. Banks can access your credit history and the amount of credit card applications you have made may impact your credit score.
If you’re thinking about cancelling an existing credit card or you’re unsure whether you’ll have the discipline to repay your card in full each month, it may be worth considering a Visa Debit card instead.
With a Visa Debit card you’ll have all the practical benefits of shopping with a card, including being able to purchase online and shop using Visa payWave—the big difference is you’ll be spending your own money and won’t accrue any interest on your purchases.
Whatever you decide, be sure it’s the right decision for you. Spending a little bit of time upfront can save you a lot of money and heartache down the track.