Credit cards offer a convenient way of borrowing and when used properly they can provide flexibility and a range of useful benefits for the cardholder. However, with hundreds of different cards to choose from, how do you know which is right for you? This Be Smart With Your Credit Cards section aims to guide you through the credit card maze and help you to manage your credit cards wisely.
How do credit cards work?
Credit cards are an ongoing ＆line of credit＊ that let you borrow money. You can use them for purchases and cash advances. You can repay the full amount borrowed each month or carry over part of the balance to the next month, with interest charged on the amount outstanding. This balance is then carried over to the following month, together with any new purchases.
Credit cards can be extremely useful and convenient. They are more secure than cash in your wallet, and can be convenient when traveling 每 especially overseas. But they make it easy to build up debt quickly.
The Good, The Bad and The Ugly of Credit Cards
- The good: A credit card is convenient for making purchases. It is much safer to carry around than cash. It is also the best way to create a credit history, which is necessary to make large purchases like a home. Often you need a credit card to rent a car or purchase things on the phone or online. Credit cards (and debit cards) can help you track your spending.
- The bad: You can lose control of your spending habits if you rely on credit cards too often, open a lot of credit card accounts or build up a lot of debt without being disciplined about paying them off.
- The ugly: If you get behind on your payments, it can be hard to catch up and your interest rate can go up. If you owe a lot of money to credit card companies and only make the minimum payment every month, it can take a long time to pay off your debt. You can damage your credit rating if you are not careful with both your spending and your payments.
What type of card is best for me?
Using a credit card wisely involves choosing the card best suited to you, minimising the cost and keeping track of how much you owe.
The card best suited to you will depend on your spending and repayment patterns, and whether you want to earn reward points. So, before you select a card, work out how you intend to use it.
If you already have a credit card you will have a good idea of your repayment patterns. If you are new to credit cards, you need to look at your current spending and budgeting habits to see how you would manage a card.
I always clear my balance in full:
Card users who pay the full statement balance of their card each month by the due date are known as ＆transactors＊. If this sounds like you, the interest rate will be less important, so opt for a card offering an interest-free period 每 usually 40 to 55 days. The date from which the interest-free period commences varies, being either from the date you make a purchase, or from the card statement date.
Look for deal that will reward you for spending. A number of cards offer reward schemes either in the form of cashback, discounts or travel points. Some are more generous than others so go for the card that gives you the best return on your spend.
If you can afford to clear you balance in full each month, but have a tendency to forget, or be late, making your payment, then set up a direct debit. This is the easiest way to guarantee you＊ll always pay off your debt on time and avoid a penalty charge.
I can never afford to repay the balance in full:
These card users 每 also known as ＆revolvers＊, pay only the minimum monthly repayment, carrying over some debt from month-to-month. This means you are likely to pay interest on the outstanding balance, so aim for a card with a lower interest rate. Go for a card with an introductory purchase offer or a low standard rate.
There are a number of deals which have interest-free introductory periods. These can be great for those who don＊t clear their balance each month. However, once the interest free period ends, you will be charged the standard rate of interest which will probably be between 12 per cent and 20 per cent. You therefore need to make sure you have paid your debt off by that time, or make a balance transfer and move it to another card.
Some people don＊t want the hassle of having to shop around for a new credit card every six to 12 months in which case a card with a low standard rate of interest is worth considering.
If you＊ve built up a debt on an existing card, look to move it over to a product offering a low balance transfer rate. Plenty of cards have introductory offers on both purchases and balance transfers - often 0% for both. If you want a card for both purposes make sure the introductory periods end at the same time, otherwise you＊ll be caught in the payment hierarchy trap mentioned above where the cheapest debt is cleared firs.
The other alternative is to have a card for each purpose 每 one for purchases and one for your balance transfer.
I＊m a regular traveller:
If you go abroad regularly, then you need a card that doesn＊t levy overseas usage fees.
Credit cards can be a safe and convenient method of payment, particularly when you are abroad, but they can also be costly. Most providers levy overseas usage fees which can significantly bump of the costs of a foreign transaction.
Credit card exchange rates are based on the Visa and Mastercard wholesale rates, with a loading percentage usually added by the card issuers. This can vary from 0% to 3% depending on the credit card. The rate applied may also be different depending on where in the world you are 每 some providers levy higher charges in countries outside Europe.
When selecting a credit card for use abroad it is also worth looking at the other facilities on offer, such as the provision of a replacement card in the event of the loss or theft of your own. Extra benefits may include an international assistance package or insurance for flight delays, lost luggage and personal injury.
Are you interested in a reward program?
Credit cards tend to come in two varieties: ＆No frills＊ cards and those offering reward programs.
Basic, ＆no frills＊ cards often have a low rate of interest, making them ideal for card users who continually carry an outstanding debt. They can also be a good idea if your card has a low credit limit as you may be unlikely to rack up sufficient worthwhile reward points. Note though, some no frills cards do provide free reward programs, most notably ＆instant＊ rewards (see below).
Other credit cards provide incentives for customer loyalty through a variety of reward programs. The main types of reward programs are outlined below, but bear in mind these ＆sweeteners＊ often come at the cost of higher interest charges and annual membership fees. Be sure you will get value for money from these reward programs before signing up for one.
Don＊t be tempted to let rewards influence your spending. Be aware too that earning rewards or cash rebates may encourage you to increase spending on your credit card.
You may be able to get discounts with selected merchants when you pay with your credit card. Your card provider will provide a list of outlets where these ＆instant＊ rewards can be obtained, and while there is usually no fee to access these rewards, it still pays to shop around to check that you couldn＊t get a better price elsewhere.
＆Cash back＊ rewards
Some credit cards will give you a cash rebate based on your level of card spending and/or your outstanding card balance. Depending on your spending pattern, this type of reward can provide a worthwhile discount, but do the sums first to make sure the discount doesn＊t come at the expense of a higher interest rate or increased unnecessary spending.
＆Frequent flyer＊ rewards
These reward programs let you accumulate membership ＆points＊ based on your card spending. The accumulated points can then be redeemed for free airline tickets.
Many frequent flyer programs charge a fee for program membership, and unless you use your credit card regularly, you may not get value for money out of the scheme. The amount of card spending required to earn rewards varies between programs, and there may also be time limits applied to the points you acquire. Some card issuers may also cap the number of points you can accumulate annually irrespective of how much you use your card. If you are a regular card user, it may be worthwhile opting for a card that doesn＊t impose this limitation.
Be aware also that it can be hard to redeem your frequent flyer points for travel during peak times like school holidays. This may not be a problem if you can be flexible with your flight dates, but if not, you may be better off paying for your air tickets and accumulating points for other purposes. Some programs allow you to redeem points with an associated travel agent so you can choose your own airlines or travel products (such as tours, or car hire or accommodation).
Another point to consider is your preferred airline. Opt for a card with access to the airline you use most frequently.
Above all, take a good look at the ＆fine print＊ on these reward programs. Make sure you are likely to get value from the program, and don＊t let reward points influence your spending habits.
'Zero rate＊ cards
You may come across credit cards offering a ＆zero＊ interest rate on balances you transfer over from an existing card. These offers can sound tempting, but always look at the ongoing interest rate applied to new purchases. If it is far higher than the rate you are paying on your current card, a zero rate card may not be such a good deal after all.
What if you don＊t want or can＊t get a card?
For younger people who cannot get a credit card, or for those who choose not to use one, a debit card is a good alternative. Debit cards offer the convenience and security of a credit card, but they draw on funds in your bank account, so there is no interest charge.
A combined debit and credit card may offer the best of both worlds. Use the debit card for everyday purchases, and save the credit card for emergencies or to take advantage of discounts on large ticket items.