A credit card is a great financial tool that can help you pay for things with more flexibility and let you earn points or other perks. But if you don't know what you're doing it's a debt trap.
Used wisely, a credit card can help you build good credit history, access funds in an emergency or get rewards like frequent flyer points.
But credit cards have high interest rates. Some cards have high annual fees (up to $400).
If you're not careful, a credit card could lead to serious debt and other issues.
Australians love their credit cards. We have 13.5 million of them! And Finder research shows that 30% of us rely on a credit card to manage our finances.
Credit cards are incredibly useful and rewarding if you pay one off on time and avoid high interest charges. If you use your card irresponsibly you can end up with thousands of dollars in card debt that just grows bigger with the high interest charges on top.
Should I get a credit card?
People who should consider a credit card
I'm looking to build my credit history for the first time. Consider a low rate, low fee credit card with a small credit limit. Use it, and make sure you pay it off in full before the interest charges kick in. This will help you build credit.
I travel a lot and want frequent flyer points to redeem for flights. There are plenty of frequent flyer credit cards that let you earn either Qantas or Velocity Points to spend on flights. These cards do have higher annual fees and interest rates.
I'm good with money and I just want a card to cover rare emergency expenses. You could benefit from a low or no annual fee credit card with a reasonable credit limit.
I have some outstanding credit card debts but I am serious about paying them off. You could consider a credit card with a balance transfer offer. These cards let you move outstanding credit card debt onto a new card with a low or 0% interest period while you pay it off.
People who should stay away from credit cards
I have unpaid personal loan debts and I have a bad credit score. You'll likely have your application for a credit card rejected. This will lower your credit score even further. Focus on paying off your debts first.
I have poor impulse control and I shop a lot. Hey, we're not judging. Nothing wrong with shopping. But if you have a habit of spending more than you can afford on things you don't need, a credit card is only going to make this worse.
I'm just about to apply for a home loan. If you can, consider waiting on that card until after you've got your home loan approved. Applying for a credit card can temporarily lower your credit score and your lender might see it as a red flag.
5 reasons to get a credit card
1. It helps you build credit history
Getting a credit card and using it responsibly is a simple way to improve your credit score. The card is added to your credit report. Making payments on time makes you look like a responsible cardholder.
2. You can use it for emergencies and unplanned expenses
If you suddenly need $3,000 to fix your car today but only $2,000 in your bank account until next week, then a card is a lifesaver.
Tip: Make use of the interest-free period for purchases
If you repay the total amount shown on your credit card statement, you'll typically get interest-free days for purchases. This gives you a way to use a credit card without paying any interest.
3. Greater security
Credit cards have more protections than debit cards. If something goes wrong or there's a fraudulent transaction on the card, it's easier to fix because the funds used for purchases are taken from the credit limit rather than your bank account.
Most credit cards offer security monitoring for your account. Some cards also let you put a temporary lock on your account, and you can also cancel a card at any time if it's stolen.
4. Credit card rewards
Rewards are the second-most popular reason people get a credit card, according to Finder research. Most rewards credit cards earn points for every dollar you spend. Many cards also offer sign-up bonuses with tens of thousands of points.
If you pay as you go or repay the total amount on each statement, a reward or frequent flyer credit card can also be interest-free. But you do also need to check if it's worth paying the annual fee.
"I actually cancelled my credit card when I applied for a home loan several years ago. It made sense at the time because I barely used it and I was in serious saving mode. A few years later and with a bigger family I'm spending so much more on essentials. Now I use a credit card to earn frequent flyer points to cover family holidays. It's well worth it, and I can now afford a card with a high-ish annual fee."
A credit card lets you spend money you don't have. That's fine if you pay the card off each month. But if you fall behind or just forget to pay it off, you'll get charged interest on your unpaid balance.
Credit card interest rates are also higher than a lot of other loans, ranging from around 8% to 28% for purchases (they can be higher for cash advances). So if you spend more than you can afford to pay back on a credit card, you could end up in serious debt.
And unlike loans, there's no end date on a credit card balance. Even a small debt gets very expensive if you take years to pay it off.
It can affect your home loan application
A history of responsibly using a credit card is proof you're a good borrower. But credit cards also affect how much you can borrow for a home loan.
The higher your credit limit (or limits if you have more than one card), the bigger the impact on your borrowing power.
Before you apply for a home loan you can lower your credit limits and avoid taking out a new card.
Credit card surcharges
Businesses are allowed to apply a surcharge for both debit and credit cards, based on what it costs the business to process the transaction. But credit card transactions cost more to process.
According to the Australian Competition and Consumer Commission (ACCC), Mastercard and Visa debit cards incur fees of around .05% to 1%.
But Mastercard and Visa credit card transactions can incur charges between 1% and 1.5%. American Express transactions also cost businesses more to process, so surcharges for these cards could be even higher.
Risk of overspending
Credit cards give you access to funds you may not already have available, which makes it easy for some people to overspend.
As well as unplanned spending, the incentive to get rewards can lead to spending more than you normally would. This increases the risk that you won't be able to repay the total amount owed on your credit card when you get a statement. And that can lead to interest charges, as well as debt.
6 questions to help you decide if you should get a credit card
How will you use the credit card? How will it help you?
Can you just use a debit card instead?
Is the card's annual fee worth the cost? (do the benefits make it worth paying?)
Will the card encourage you to spend money you don't have?
Will you pay the card off each month or will you end up carrying an unpaid balance?
There's no requirement for you to use a credit card, so it's up to you to decide if and when you pay with it. Just make sure you meet your repayment obligations (shown on your statement), including repaying any annual fee. If you only plan to use a credit card occasionally, you may also want to consider one without an annual fee.
If you're trying to decide between a credit card and a personal loan, consider what you want the funds for. Personal loans are typically suited for big expenses that you plan to make in a short period of time and want to pay off over a few years, such as a major holiday, car purchase or medical expenses. Credit cards give you access to ongoing credit you can use at any time, and pay off straight away or over a longer period. And both can be considered for debt consolidation.
If you're considering a credit card, other options to compare include:
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio
Richard's expertise
Richard has written 554 Finder guides across topics including:
Amy Bradney-George was the senior writer for credit cards at Finder, and editorial lead for Finder Green. She has over 16 years of editorial experience and has been featured in publications including ABC News, Money Magazine and The Sydney Morning Herald. See full bio
Amy's expertise
Amy has written 565 Finder guides across topics including:
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