Used in a smart way, credit cards can be a great source of rewards and additional benefits. But they do come with some drawbacks.
Credit card drawbacks:
The smart ways to use your credit card
- Credit cards require self-discipline. If you’re not financially disciplined, then credit cards are not for you!
- The interest rates are high and your card balance can quickly compound and get out of control. Anyone not paying their balance off regularly will quickly be paying a huge amount of interest each month, which takes most people a long time to repay. In this case, paying with cash, or an EFTPOS or debit card, is probably a much better idea for you.
- Fees, such as transaction fees and annual fees can be high.
- The combined total available limit on all your credit cards is considered debt by lenders. So, if you’re applying for a home loan from a bank and you have two credit cards, each with a limit (line of credit) of $5,000, the bank will consider that you’re already $10,000 in debt – even if you’ve never used the total limit available to you, and even if you currently owe nothing on the cards.
1. Reward points or cash back: Select the card that best fits your lifestyle with regards to reward points or cash back.
2. Sign up bonuses: Banks want you to have a credit card, so many of their cards offer bonuses for those who sign up for one.
3. Credit building: If you’ve never had any sort of debt, you may have a limited credit history. Well-disciplined use of a credit card can build a good credit history and prove you can be disciplined, which may increase your chances of getting ‘good’ debt (such as a home loan) later. If you’re applying for a home loan, it can be a good idea to drop all the limits on your cards to $1,000 or $2,000 so they don’t negatively impact the loan application.
4. Interest-free period: Most credit cards now offer an interest-free period of 30 days on all purchases (depending on the time of month of purchase). Alternatively, if you pay with an EFTPOS or debit card, cash, or online banking, your money is gone instantly.
5. Safety: Paying with a credit card makes it easier to avoid losses from fraud. If your EFTPOS or debit card is used by a thief, the funds leave your account instantly. If your credit card is used fraudulently, you haven’t lost any cash, owing to the delay before a credit card company makes payment to the provider of goods or services. So, if you’re the victim of fraud, notify your credit card company and tell them not to pay for the transactions you didn’t make. Usually, the credit card company investigates and resolves the matter.
6. Insurance: Many credit cards automatically come with a range of protections and benefits most people don’t even realise they have, such as rental car insurance, travel insurance, and even warranties on purchases which can exceed the manufacturer’s warranty.
The bottom line
Credit cards are suited to disciplined people who remain aware of the need to pay off their credit card in full before any interest is incurred, while maximising use of the benefits.
If you’re capable of using a credit card responsibly, then shifting as many purchases as possible to a good credit card is probably a wise idea. Then the benefits explained above will add up to put you comfortably ahead of where you’d be if you were just using cash and EFTPOS.