When used responsibly, credit cards can be a convenient way to purchase big-ticket items and earn rewards, such as business class flights. Some offer free travel insurance. Credit cards can also generate positive credit scores when debt is avoided, which will be helpful when applying for a home loan.
While alternative credit models such as buy it now and pay later are growing in popularity, there are still 13.16 million credit cards in Australia (which are held by 19.69 million adults).
The most important thing to keep in mind is that a credit card is basically a loan that needs to be paid back on time.
Data from saving.com.au reveals that in July 2022 there were some $17 billion in balances in Australia bearing interest. There was a Increase of $162 million in the amount of accrued interest credit card debt in the last two months of last year, prompting experts to warn that Australians may be turning to bad credit habits from the past, after being relatively cautious during the pandemic. Nevertheless, we are still far from the $27 billion in interest debt at the end of 2019.
Non-payment of the full amount due each month is penalized by interest on the balance. It can be tempting to view a credit card as a more flexible arrangement than it is. A debit card may be a better alternative if paying it off every month isn’t realistic
Debt in the form of interest can spiral out of control too quickly. Credit card interest can seem complicated and the terms and conditions attached to a particular card may not be presented in the most accessible way. However, but once you understand the basics, it’s quite simple.
Different types of credit cards
Credit cards with balance transfer
A credit card balance transfer involves transferring the amount owed on one card to another credit card, usually with a lower interest rate or 0% interest rate for a fixed term. If the debt is repaid within the stipulated time frame (which is usually one or two years), it can save money. However, some cards revert to a much higher interest rate once the interest-free period expires, so in the long run this can be counterproductive and costly.
Loyalty cards and loyalty cards
A frequent flyer credit card can be used to earn points on most everyday purchases, as well as some subscriptions. Each time a purchase is made with the credit card at certain points of sale (participating stores, gas stations and online retailers), points are applied to the person’s account.
These points can be redeemed for retail purchases, flights, flight upgrades and hotel rooms. These cards are linked to airline loyalty programs such as Qantas Frequent Flyer and Virgin’s Velocity Frequent Flyer.
Credit card with no annual fee
Many credit cards offer the first year interest-free, but some have no annual fee entirely. Cards that never charge a fee typically offer fewer extras, such as airport lounge passes and travel credits. If a credit card is only used for emergencies, this may be a good option.
A private card is the result of a partnership between a bank and a merchant to offer a line of credit. Some store cards can only be used in-store, while others look like traditional credit cards and can be used anywhere. The store may offer exclusive offers to cardholders. Interest on the card accrues like other types of credit cards, and is likely to be higher.
What are some of the most popular credit cards?
The main Australian banks offer a wide range of credit cards for customers and non-customers: ANZ, Westpac, Commonwealth Bank and NAB.
Qantas and American Express are also popular options, along with Bankwest, Citibank and Kogan.
How does credit card interest work?
There’s no doubt that credit card interest can be expensive. It is estimated that the average credit card balance is $2,887 and the average balance that earns interest is $1,356. As for the estimated interest rate? That’s a mind-blowing 16.88%
Credit card interest is made up of a number of components: the annual percentage rate (APR) which is a term for the stated interest rate and a daily rate: the APR divided by 365 days of the year.
It also consists of the average daily balance, which is the account balance for the month multiplied by the number of days in a given month. Credit card interest is charged if the balance is not paid in full by the due date each month.
Monthly interest payments become due in addition to the outstanding balance, which can accumulate over time if the debt is not repaid promptly. The interest rate applies to each purchase made during the month.
Get Approved: How to Apply for a Credit Card
Online applications for credit cards can take as little as ten minutes and are usually answered immediately. Lenders will refer to a credit score, which is a number between 300 and 850 that represents creditworthiness, i.e. the discipline to repay debts on time. Income and employment status are also taken into account.
Make sure you are sure you can repay the card each month before you consider applying.
How to Compare Credit Cards
There’s a lot to weigh when choosing a credit card. The right choice should reflect individual spending habits. Here is a checklist of factors to consider.
- A “honeymoon” or introductory interest rate is a low or zero rate for the first year or so after getting the credit card: always be sure to check the rate after it and when It starts.
- Rewards programs may sound amazing, but they can also incur fees, so it’s only worth it if the perks can be used.
- Understand the different fees: foreign transaction fees, monthly fees, late payment fees, cash advance fees, and over-the-credit-limit fees, to name a few.
- The purchase (interest) rate, i.e. the long-term interest rate once the honeymoon period is over.
- Are there annual fees as well as monthly fees? There can be both.
- The card may offer free travel insurance. This can be activated when you spend part of your vacation reservation (flights, for example) on the card.
- Check the length of the interest-free period: how many days after the purchase must pass before interest is charged?
- The balance transfer rate is always an important consideration and the lower the better.
- Is it a financial institution with good customer service?
How to manage your credit card debt
There’s no point sticking your head in the sand when it comes to credit card debt and the better prepared you are, the better you’ll manage:
- Make credit work to your advantage by paying what is owed in full and therefore without having to pay interest.
- To start, get a card with a low limit to avoid the risk of quickly accumulating large debts. Resist the bank’s offer to increase the credit limit.
- Switch back to a debit card if reimbursing the amount owed is problematic.
- Call National Debt Helpline if the situation has gotten out of control: 1800 007 007
- If the debt is large but manageable over time, ask the bank for a repayment plan.
Do you really need a credit card?
It’s important to ask yourself if you’re disciplined enough to handle a credit card.
Using a credit card as a borrowing tool will inevitably lead to financial hardship which could affect your credit score and cause ongoing hardship. Having multiple cards can make the problem even worse, and banks may refuse to lend you when it comes time to buy a house.
If the card is well managed, it can be useful for pre-booked holidays as it can lead to a discount. Paying for flights with a credit card can be rewarded with upgraded seats, free future travel, or free travel insurance.
Rewards programs, points, discounts and other bonuses: everything is possible if you use a credit card correctly (and not the other way around).