Responsible ways to use your credit card

Emma Duffy By on June 14, 2019
 
credit card

Credit cards can be a blessing or a curse, but they often get a bad rap – mostly because they usually aren’t used responsibly.

What’s in this guide:

Credit cards can earn you rewards points, provide you with perks (such as complimentary travel insurance and price protection insurance), and be your ‘get out of jail free card’ if you’re in a sticky situation. But they can also be a one-way ticket to insurmountable debt if they’re misused. 

Here’s Savings.com.au’s guide on how to use a credit card responsibly. 

When should you use your credit card?

Online purchases

When you’re splurging in the world of online shopping (where the threat of cybercrime is omnipresent), a credit card may offer you more protection than a debit card. If a hacker manages to steal your debit card details, they could have access to all the money you have in the account that’s linked to that card – unlike with a credit card, where they’ll generally only have access to the card provider’s funds. While most debit card providers vow to return any funds lost to online fraud back into your account, this can take time to process, potentially leaving you out of pocket for a while.    

Also, some credit cards offer complimentary purchase protection insurance, which is like a warranty that can cover your losses in case the item arrives damaged, or not at all.  

Even though credit cards can be safer when shopping online, you should still exercise caution when using them. Avoid websites that aren’t secure and don’t give out your credit card details to just anyone

Travel

It’s usually better to save for a holiday, but you may want to consider using a credit card to take advantage of cheap flights and deals by pre-booking. Plus, you can literally be rewarded for spending money on your holiday if you use a travel rewards card. Some credit cards even come with an annual flight voucher or travel credit that you can use to pay for flights.  

However, don’t put your entire vacation on your credit card unless you know you can afford to pay it all back before interest starts accruing. Charging your entire holiday to your card could leave you with months or even years of debt. To avoid post-holiday debt lag, plan ahead. Work out a budget for your holiday and start saving. Use a credit card that comes with a frequent flyer rewards program that will reward you for your holiday spending. Or, use a card that offers complimentary travel insurance when you pay for pre-booked holiday expenses such as accommodation and flights. 

Emergencies

You really should have an emergency savings fund squirrelled away for this exact situation. But if you don’t, or you just don’t have enough emergency funds to cover the unexpected cost, it’s nice to know you have something to fall back on.

The only risk of doing so is that it can make you reliant on your credit card every time an emergency pops up. Using your credit card for a rare, one-off emergency is probably not going to send you broke. But what if a second or a third emergency occurs? Your finances could quickly spiral out of control and send you into debt. 

Car rentals & hotels

Some car rental companies and hotels require a credit card for a pre-authorisation payment. This is because if any unexpected costs arise (such as damage to the car or hotel room) the company knows they can use the funds from your credit card, whereas your debit card may not have enough funds to cover the costs. Many car rental firms and hotels these days do allow debit cards for pre-authorisations, but this typically involves locking away a large deposit of funds from the account which may not be returned for weeks.  

Some credit cards come with complimentary domestic car rental excess designed to cover you for the excess you would otherwise be required to pay in the event your hire car is damaged or stolen. 

When shouldn’t you use your credit card?

To buy a new car

Charging your new car to your credit card is an extremely risky move. If you max out your credit card, it may result in penalty fees and a black mark on your credit card. Similarly, if you struggle to meet your monthly repayments on such a huge purchase, you could end up with late payment notices or defaults that will damage your credit score. Either way, your card issuer won’t be your number one fan.

Instead, consider taking out a car loan which often comes with a far lower interest rate than a credit card. 

ATM withdrawals and cashouts

This one is probably the most obvious example of what NOT to do with a credit card because it will attract cash advance costs. 

Cash advances occur when withdrawing cash with a credit card – whether that be from an ATM or at the checkout. Cash advances incur a cash advance fee, which can be either a flat or percentage fee based on the amount of money you withdraw. On top of this, interest is charged on cash advances from the time you make the withdrawal, and the interest rate applying to cash advances is often far higher than the interest rate for making purchases.

Cash advances also have no interest-free days, meaning you will be charged interest from that day until you pay off your balance. 

You should only ever use a debit or EFTPOS card to withdraw money, as you can access your funds interest-free. 

Mortgage repayments

Since you can’t pay for credit with credit, most credit cards will process your mortgage repayments as cash advances. Essentially, this means that if you do decide to make a mortgage repayment using your credit card, you will be charged a whopping interest rate of between 19-22%. That won’t look very good later on if you can’t pay down your full account balance. 

If, for some unforeseen reason, you are really struggling to make this month’s mortgage repayment, you can try appealing to your mortgage lender for a hardship variation. This is where the mortgage provider makes changes to the terms of the loan, based on financial hardship. 

Impulse buys

It kind of goes without saying that using your credit card for impulse purchases is a bad idea, yet a lot of people do it because credit cards lend themselves really well to impulse spending. It’s extremely convenient to just chuck everything on there in the midst of a shopping spree without even thinking about it – until you hit your credit limit and wind up with debt that you can’t repay.

Instead, only use your debit card or carry cash when you’re out shopping. That way, you have a self-imposed limit of money you can spend, which will limit your impulse purchases, and you’re only spending money you actually have. 

Foreign currency or travellers’ cheques

Travellers’ cheques and foreign currency are considered cash advances. You will incur interest (and possibly even a cash advance fee) from the time of purchase and you will carry the interest for as long as you carry a balance on the account. 

Instead, use cash or a debit card for foreign exchange transactions or when buying travellers’ cheques. Alternatively, use your credit card overseas to pay for purchases, but be wary of international fees. 

Bills and fines

Some fines and government charges can be processed as cash advances on credit cards. This can also apply to utility and telco bills. If you do pay your bills via your credit card, some companies may impose a 2-5% surcharge for doing so.

Instead, pay your bills and any fines via direct debit from your bank account. 

To pay off another credit card

Again, you can’t pay for credit with credit. But if you’re struggling to repay a lump of credit card debt that’s accruing large amounts of interest, you may want to consider doing a balance transfer of this debt onto a new credit card with a 0% balance transfer offer. This can provide you with some breathing space to pay off the debt without interest costs setting you back. The aim is to completely pay off this debt before the end of the 0% balance transfer period, which can last up to 26 months.  

However, one problem with balance transfers is that many people lack the discipline to pay the entire debt off over the period, and then get stung with a higher interest rate after the honeymoon period ends. So only utilise them if you’re truly committed to paying the debt off.   

Large, one-off purchases

The trouble with using your credit card to fund big-ticket items is that you tend to spend more when you swipe. If you had to hand over $3,000 in cold hard cash for that new flat screen TV, you would probably think twice about it. 

Putting big-ticket items on credit can also increase your risk of maxing out your credit card and damaging your credit score with missed payments.

It’s generally better to budget and save up for large, one-off purchases instead of going nuts at the local Westfield and throwing it all on the credit card. 

Can you pay your rent with a credit card?

In short, yes.

Paying rent with your credit card does seem like an easy way to earn frequent flyer points or free up cash flow. It’s convenient, and if you make your repayments on time, can help you maintain a strong credit score. 

While it’s certainly possible to use your credit card to pay your rent, this option comes with restrictions and extra costs. These include fees and surcharges that may outweigh the benefits you receive from redeeming any rewards points. Plus, putting payments on your card which you can’t afford to repay may leave you at risk of debt – which could damage your credit score.

The bottom line is when it comes to payments of your rent, it is dependent on whether your real estate agent or landlord offers credit card options – and most in Australia only offer electronic funds transfers (EFT), direct debit payments or BPAY as their preferred payment options. Sometimes you can pay with money orders, cash or cheques – but you will rarely see credit cards listed as a payment method.

Tips for using your credit card smartly

1. Start by picking the right credit card

Get off on the right foot by choosing the right credit card to begin with. Take the time to assess your personal needs, your spending habits, what your long term financial goals are, and the features that are important to you to ensure you’re making the best credit card decision. 

The most important thing is to pick a credit card that you can afford. If you’re a low to middle-income earner, look for a card with low fees or a low interest rate. 

Here’s our article on how to apply for your first credit card.

2. Don’t fall into the minimum repayment trap

Even with the very best planning, sometimes your balance just rolls over from one month to the next. It happens. 

But a lot of people fall into the trap of only meeting the bare minimum repayments every month and by doing so, you’ll wind up paying a lot more in interest and it could take you years to pay off your credit card debt

If you do find that you’re regularly struggling to pay more than the minimum monthly repayments, you may want to consider switching to a card with a lower interest rate. And if you do end up switching, make sure you close your old card properly so you don’t wind up stuck with even more debt. 

3. Don’t use your credit card to make ends meet

If you’re running low on cash before payday and can’t pay your bills, using your credit card may be a short-term solution, but it will only sting you in the long run because you’ll end up with more debt. 

To avoid this situation, build an emergency fund so that you always have a safety buffer and don’t need to rely on your credit card to see you through.

4. Pay your credit card off on time

Making sure your credit cards are paid off on time is credit card 101. Missing your repayment deadlines means you’ll be left with whopping interest on the outstanding amount. 

To avoid this situation altogether, simply set up a direct debit to make sure your bills are always paid off on time. Setting up automatic transfers is a good practice to get into for all your bills, especially if, like me, you’re extremely forgetful. Set and forget!

5. Beware the balance transfer 

As mentioned earlier, approach the balance transfer with caution. The revert rate on balance transfers (that is, the interest rate your new card reverts to after the balance transfer period has ended) can be as disgustingly high as 24% in some cases. 

In 2018, ASIC reported that 30% of balance transfer users wound up increasing their debts by 10% or more after transferring their balance, which kind of defeats the purpose, since a balance transfer is supposed to help you eliminate your debts, not wind up with more.

6. Set a sensible credit card limit and stick to it

Your credit card limit should be an amount you know you can afford to repay, and one that won’t tempt you to spend any more than you can afford. 

While you can indicate a preference for your credit card limit, your provider will ultimately make the final decision. To do this, they assess your income, employment, your credit history and current debt levels, and the card itself.

So if you often struggle with debt, don’t go for a higher credit card limit. Having a higher credit limit will only make it easier to fall into debt because you run the risk of overspending. 

7. Don’t use your credit card for your everyday spending

Too many people make the mistake of using their credit card for incidental, everyday purchases and then wonder why they’re in so much credit card debt. It may not seem like it at the time, but all those $5 and $10 purchases add up over time. 

To avoid this, you may want to consider only using your credit card for occasional purchases (e.g. online shopping, travel, car rentals) or emergencies. This way, if an unexpected expense arises (like your car breaking down) they can be dealt with quickly.

Also, buying a fancy new outfit for a party you were invited to at the last minute doesn’t constitute as an emergency.

8. Consider a rewards card

If you’re a responsible credit card user, you may want to make your credit card work for you, and taking advantage of rewards programs offered by many credit cards can be a good way of doing just that. 

Just be sure to go for a rewards program that suits your lifestyle. If you aren’t a frequent flyer, a travel rewards card probably isn’t the best option for you.

Also, ensure that the rewards outweigh the costs of using the card, including fees and interest. A recent study published by Australia’s Reserve Bank (RBA) found that only 40% of credit card users in Australia gained a net positive value from their credit card.     

9. Limit the number of credit cards you have

Since every new card increases your credit limit, you should aim to have as few as possible to reduce the likelihood of racking up enormous amounts of debt.

More cards and higher credit limits could trick you into spending more money, and if you’re not careful, you could end up overspending. Also having a higher credit card limit can harm your chances of being approved for other sources of debt such as a home loan or car loan.     

Savings.com.au’s two cents

Ultimately, the rule of thumb with credit cards is to avoid carrying debt or interest charges that you can’t get rid of. Otherwise, you risk damaging your credit score, which will have long-term implications.

This doesn’t mean that you should avoid using credit cards altogether – it just means you should only use them if you know you’ll be able to repay your monthly balance in full. 

Always drink use your credit card responsibly!

Emma Duffy
Emma Duffy joined Savings.com.au as a Finance Journalist in 2019 after spending a year as the editor of The Real Estate Conversation. She's most passionate about improving the financial literacy of women and millennials by writing about complex financial topics (what's an ETF I hear you ask?) in a way that's easy for the average Joe (or Jill) to understand.

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