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Why Do You Want a Credit Card?
The first question you should ask yourself is why you’re looking for a new credit card. Credit cards can be very beneficial when they are used responsibly, but credit is not a substitute for cash. Your motivation for getting a credit card can be a key indicator as to which card is for you.
Here are a few reasons people get credit cards:
- Build credit history
- Earn rewards points
- Transfer a high-interest balance to an interest-free credit card
- For emergency expenses
- For regular expenses when cash is tight
- Because the bank gave them one
Someone who has a credit card for emergencies only has very different needs from someone who is using it to earn rewards points; therefore they should be looking at different types of credit cards. We’ll get into more detail on the types of cards and who they’re for shortly.
Can You Pay Off the Balance Each Month?
The next important question to ask is whether or not you’re going to pay off your credit card balance each month. This is key in figuring out the type of credit card that’s good for you.
If you intend to use the card and pay the balance in full each month, you have a wider range of choice in credit cards. Start by looking for a credit card with an interest-free period (usually around 55 days). This way, you can pay off your balance each month and never accrue any interest.
Paying off your balance means that you won’t be slammed with interest fees, which can make a rewards credit card more practical. However, be aware of annual fees that may apply whether your card carries a balance or not.
If you can’t afford to pay the balance in full each month, focus your search on credit cards with a low interest rate.
Types of Credit Cards
Before digging deeper into your life stage and spending habits, let’s take a quick look at the common types of credit cards available in Australia.
Your Life Stage
Where you are in life may have an impact on the type of credit card you choose. When you’re young and just starting out, your credit needs and standing are not the same as when you’re retired. Here are some general life stages that may inform your finances:
- Student: Building credit, learning to manage money
- Young professional: Balancing income and expenses
- Couple: Merging finances
- Family: Managing debts, assets, income, and child-raising expenses
- Retired: May have more assets but a lower income level
Of course, not everybody falls into these categories, and the variance within each category is widespread. However, knowing your current life stage and where you see yourself in the future can help you manage your credit card choices.
Your Financial Situation
Your current financial situation is a key factor in choosing a credit card. As your financial situation changes, your credit card needs may change too. Fortunately, credit cards typically do not have lock-in contracts, so you are free to switch cards at any point—though you’ll have to clear the balance before closing an account.
Here are a few examples of financial situations and the credit cards that can apply to each.
In credit card debt
If you already have credit card debt, you may be focused on reducing that debt. Balance transfer credit cards can be very helpful in consolidating debt.
You can transfer the debt from your current card (or multiple cards) to a new card with a 0% interest fee on balance transfers. Then you can focus on paying down that debt as quickly as possible before the 0% interest period expires. Be aware that there may be additional fees associated with the card, such as a balance transfer fee or annual fee.
Reliant on credit cards to pay expenses
If you’re not quite covering your monthly expenses and need a credit card to supplement them, then a low-interest credit card may be for you. Keep in mind that this still isn’t a long-term solution, as relying on a credit card to pay the bills will eventually get you in debt, until you are able to pay the balance off in full.
If you’re breaking even by paying your expenses without getting snowed under, then a credit card may be part of your overall financial management plan. As long as you’re paying your balance off every month, you’re in a good position to choose from a range of cards, including a rewards card or card with no annual fee.
High-income earners who frequently use their credit card can be in a good position to earn rewards points or reap the perks of a premium credit card. However, if you’re not going to use these benefits, then it doesn’t hurt to be fiscally conservative and look for a more basic card type.
As a business owner, it’s smart to keep your business expenses separate from your personal expenses. There are credit cards geared specifically towards business owners both large and small, whether you are the only employee or have several. These cards may provide rewards and discounts towards related services, as well as the ability to manage spending limits on multiple cards.
Your Spending Habits
The way you spend money has major implications for the type of credit card you choose. If you find that your credit card burns a hole in your pocket and consistently spend more than you can afford, avoid high-interest cards.
On the other hand, if you’re the type of person who spends big but within their means, then you may want the additional benefit of earning rewards points for each dollar that you spend. Don’t be swayed by marketing tactics, however: carefully consider the rewards on offer and whether or not you are likely to actually use them.
If credit cards make you nervous and it’s just an extra layer of financial security, then you may want a card that you can ‘set and forget’, meaning one with no annual fees.
Big spender? You may enjoy the benefits of premium cards, which come with rewards like airport lounge access and concierge services. These come with plenty of perks, but fees tend to be higher so be aware of what you’re signing up for.
If you tend to spend money on specific items, such as travel, or in one particular store, then having a travel or store credit card could work in your favour.
Credit Card Considerations
Here are a few final things to think about before you start comparing credit cards.
Limited promotional periods
Many promotional features of a credit card, such as no annual fee, 0% balance transfer, or low introductory rates, may come with an expiration date. While this isn’t always the case—some no annual fees are for the life of the credit card—be sure to find out the details. Otherwise, you may find yourself getting hit with unexpected costs when the period ends.
Cash advance rates
Many credit cards do have a cash advance feature, but this can be extremely expensive. There is an additional fee charged on top of interest, and a modest cash advance can quickly become a large expense.
Annual fees are often the trade-off for a credit card’s selling points. When choosing a card, weigh up the annual fee against any benefits to decide if it is worth the cost. Note also that low or no annual fees may be for a limited time only.
It’s easy to get sucked into a rewards credit card, especially when it has a slick marketing campaign. Read the terms and conditions carefully to make sure that you’ll actually benefit from the rewards scheme. The same goes for your bank offering you a credit card. Just because you’re already a customer doesn’t mean they’ve got the best deal for you.
Comparing Credit Cards
Ready to shop for credit cards? When comparing cards, here are some of the details to look at:
- How minimum repayments are calculated
- Any applicable fees and charges
- Whether or not there’s an interest-free period
Credit card companies are required to provide key fact sheets with most of this information, so you can download them and have a look before you buy.