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Credit cards are a staple of Australian spending, with more than 16 million active accounts across the country collectively making over $25 billion in transactions each month (according to 2018 Reserve Bank statistics).

Since launching in Australia in 1974, these convenient pieces of plastic have provided millions of Aussies with fast easy access to credit – fuelling a ‘live-for-today’ shopping culture. Meanwhile, they’ve also sent many into crippling levels of debt and financial distress.

Because of this, credit cards are a product that divides personal finance experts – some advise everyone to completely abstain from using them, while others argue that when used responsibly, they can provide net financial benefits for consumers.

At Savings.com.au, we’re in the latter camp (although we agree that some people really should cut up their credit card). We want our practical savings info to help Australians with their credit cards, be it through helping them:

  • choose a credit card
  • choose a credit card
  • take advantage of the perks; or
  • avoid the traps.

How do credit cards work, exactly?

A credit card is essentially a line of credit up to a specified limit (a credit limit).

Let’s say you apply for a credit card with lender A: they offer you a credit limit of $10,000. This means you can borrow up to $10,000 a month, borrow being the key word. This money needs to be repaid to the lender within a certain payment period. If it isn’t, you’ll be charged interest on the remaining balance.

Credit cards can be extremely useful, as they give you quick and easy access to a cash flow you might not have at that exact moment. But it’s the interest (plus fees) that can catch a lot of people out; we’ll cover this in greater detail below.

First, let’s take a look at some of the different types of credit cards you can get:

The different types of credit cards

Credit cards can be categorised into five different types:

  • Low rate cards: basic credit cards with low interest rates, better suited to those that don’t always pay off the balance at the end of every statement period. Because of their no-frills design, these cards are less likely to come with ‘premium’ features like rewards programs or complimentary insurances
  • Low fee cards: basic no-frills cards with little to no annual fees, suitable for those who regularly pay off the balance every statement period and simply want a credit card for the convenience – they’re not interested in rewards programs or other premium features
  • Rewards cards: cards that are designed to optimise user’s spending by gifting them rewards points, which can be redeemed for cash, vouchers, flights, merchandise, entertainment tickets etc.
  • Premium cards: cards that offer extensive benefits to customers, like a concierge service, complimentary insurances (e.g. travel insurance, price protection, airport lounge access and more. These cards tend to come with higher rates and fees
  • Frequent flyer cards: cards for those that want to accrue rewards for their spend that can be redeemed for flights and other travel costs through a particular frequent flyer scheme.

Credit cards should not be confused with bank debit cards – the cards you use to access existing funds in your bank account.

Interest rates on credit cards vary significantly. While the rates on the more basic low rate and low fee cards can be less than 9%, there are cards that charge customers more than 20%. You'll find that the average credit card interest rate tends to hover at around 17%.

It's important to know that interest isn't charged on all purchases made on a credit card, at least not straight away. There are some exceptions to this, such as purchases made on balance transfer cards (link to BT traps article) or if your card has no interest-free days (link to interest-free days article), but you'll generally have until the end of your statement period to pay off your balance before you're charged any interest. So, for example, if you spend $1,000 on your card and pay all of it off before the end of the statement period, then you won't be charged interest.

Failing to pay off the full balance on the card each period results in interest being charged on the remaining balance.

Example: interest on a $5,000 credit card debt

The table below demonstrates the potential interest costs and estimated repayment time on a $5,000 credit card debt at different interest rates (9%, 14% and 17%) and monthly repayment amounts (2.5% of the balance and $300 per month):

  9% 14% 17%
Interest charged with minimum repayments (2.5%) $2,074 (19 years + 1 month) $4,181 (24 years + 1 month) $6,125 (28 years 10 months)
Interest charged with higher repayments ($300 per month) $319 (1 year + 6 months) $520 (1 year + 7 months) $652 (1 year + 7 months)

Calculated using MoneySmart's Credit Card Calculator

The lower the interest rate and the higher the repayments you make, the less you'll pay in interest. You can read more about how interest works on credit cards here, including some detailed breakdowns and examples.

As well as the interest rate, fees are another major consideration for choosing a credit card. There are a number of fees charged by credit card providers, and depending on the card you have they can really add up over the long-term. Around 30% of credit card users actually don't get any positive value out of their credit cards after taking fees into consideration, according to a report by the Reserve Bank.

Arguably the biggest and most well-known credit card fee is the annual fee, charged by the card provider to cover for the cost of keeping the account active, plus the cost of any features and benefits that card might provide. This fee can be $0 for your more basic cards, but annual fees over $700 and anywhere in-between are also the norm. The annual fee alone can make a card not worth using if it costs too much to simply have it in your wallet.

Other commonly found credit card fees include:

  • Currency conversion fees
  • Cash advance fees
  • Balance transfer fees
  • Late payment fees
  • Over the limit fees
  • Dishonour fees
  • Over the counter fees
  • Replacement card fees

You can read Savings.com.au's more detailed breakdown of these fees here. Most of these fees are avoidable if you know what you're doing.

Credit card rewards allow you to earn 'points' for every eligible $ you spend, which can later be redeemed for:

  • Discounts
  • Flights or flight upgrades
  • Merchandise, such as gift cards, free food and drinks, free entertainment tickets and more
  • Cashback, which gives a certain percentage (about 5%) of credit card spend back into your account

Rewards sound great on paper, and they can be if you use them correctly; a card's rewards program might perfectly align with your spending habits and you could rack up the points fairly quickly. The catch is that one rewards point might actually be worth extremely little, and even earning thousands of points might not be enough to cover the card's fees and potential interest charges. Rewards cards are more likely to charge higher fees and interest rates, so it can be easy to actually lose money on them if you're not suited to one.

As a general rule, one reward point is equal to roughly one cent, give or take a little bit, so try not to be swayed by huge points offers (link to signup bonus article) because they might not actually be worth that much.

Example: the annual fee outweighs the rewards

Alexa does most of her spending on her credit card, and in one year she spends enough to generate enough rewards points to save $300 on her grocery shopping. BUT, she didn't take into account the fact that her card's annual fee is $395, so she's actually net-negative on this card. She also had to pay several hundred in interest at various stages throughout the year, so a card with a lower annual fee or interest rate might have suited her better.

It's not just the ease of spending and rewards points that make credit cards worth using. There are a host of cool features your card might come with that can come in handy during your everyday life. Some of the more common features include:

  • Balance transfer offer: a balance transfer offer on a credit card allows you to transfer credit card debt from a previous card and be charged little to no interest on that debt for several months. With a good balance transfer offer, you can erase your old debt at your own pace without being charged interest. But be warned: if you don't pay off the debt before the end of the balance transfer period, any leftover balance will be hit with sky-high revert rates.
  • Travel insurance: your card might come with a travel insurance policy attached, which can be more convenient than having to buy one separately. Be sure to read our article on credit card travel insurance to assess whether it's worth using.
  • Airport lounge access: keeping with the travel theme, you could also gain access to some fancy airport lounges. This is sometimes limited to two to four visits per year, and might only cover the cardholder and a maximum of one guest.
  • Concierge services and personal shoppers: "Say Jeeves? Be a good chap and book my flights for me, would you?" This type of service may be available on cards that offer a 'free' concierge service, making it easy to make arrangements for travel, dining, entertainment and holiday activities. Some of these services are highly personalised and have people available 24/7, either in-person or over the phone.
  • Price and purchase protection insurance on recent purchases: price protection cover allows you to claim the difference in price between two items you've bought with the credit card, while purchase protection covers items that are lost, stolen or damaged. These two combined can give you a real peace of mind when making larger purchases.
  • Fraud protection for online purchases: this feature protects cardholders against fraudulent transactions made using their own credit card and can alert them when suspicious transactions are made.
  • Rental car excess cover: excesses for rental car insurance can be thousands of dollars, so if you do have an accident with a rental car, this feature might have you covered.

Each of these different features vary, sometimes significantly, between the different cards, and each one has different terms and conditions as to when you can and can't use them. This is why you should read your card's PDS (product disclosure statement) and note what you're eligible for because you never know when they might come in handy.

As with rewards programs, cards that carry these features are more likely to carry higher fees and a less appealing interest rate, so consider whether a card with any of these features is worth the extra cost over one without them.

As at August 2018, the RBA reports that the total outstanding credit card debt in Australia is around $32.2 billion accruing interest, which, when averaged among every cardholder in the country, is more than $2,000 each. While you might be a savvy spender, the average Joe or Jane clearly isn't.

It's not just credit cards that allow debt to build up either. Aussies borrow about $46.6 billion a year through personal loans too for things like cars and holidays. Some people put this debt onto their credit cards, which might alleviate a short-term problem but leads to more debt in the long-term.

The point is that no matter how much you have on your card, if you don't pay it off in full by the date specified by your provider, you'll be charged interest on the amount left over. Some people make the mistake of only making the minimum repayments on their cards each month, which can seriously stretch out your debts over a longer period of time.

The longer you take to pay off a debt, the more interest it will accrue, so paying it all off as soon as you can is the best way to avoid it altogether. This can be done by:

  • Setting up a direct debit with your provider to pay off the full balance by the due date
  • Setting yourself a reminder of each due date and doing it manually
  • Asking your provider to set your due date at the same time as your other repayments to make it easier to remember

There are plenty of things you should think about before settling on a credit card. The interest rate, the fees, the features and potential rewards programs are just a start - you should also probably look into things like how much you're likely to spend each month, the support offered by the provider themselves, how easy it is to open and cancel the card, bonuses they offer for new customers and more.

But what you should really consider above all is your ability to be a responsible credit card user. Debt can sneak up on you, and picking an unsuitable card can increase your interest repayments quickly. It might be a better idea to not get a credit card at all, especially if you're already paying too much.

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