The benefits (and drawbacks) of using a credit card

Benefits of a credit card

There are plenty of reasons why people use credit cards to make purchases. When used responsibly, they offer a variety of benefits.

According to the Reserve Bank’s Credit and Charge Card statistics, in August 2018 there were more than 16 million active credit card accounts in Australia (about one for every member of the working-age population) and $24 billion of credit card transactions were made.

These devilish rectangles of plastic are notorious for getting Aussies into financial strife – with the average interest-accruing credit card debt standing at over $2,000.

But with a bit of discipline and impulse control, credit cards can be a useful tool for your everyday life, offering several key benefits:

  • Rewards and Frequent Flyer miles
  • Cashback offers
  • Special perks and features
  • Ease of purchase
  • Safety
  • Overseas spending
  • Building your credit profile

Let’s explore these in greater detail.

Rewards & frequent flyer points

Credit cards attached to rewards or frequent flyer programs allow cardholders to earn points on every dollar of eligible spend. So if you’re a regular big spender, you may be able to get some extra bang for your buck.

These points can be used towards a variety of things, such as:

  • Flights
  • Flight upgrades
  • Gift cards
  • Groceries
  • Car hire and hotel stays
  • Events and experiences, like movie and concert tickets
It’s important to note that cards with rewards or frequent flyer programs tend to come with higher rates and fees, so not paying off your balance every month can lead to some significant debts.

Also, be careful you don’t fall into the trap of spending more than you normally would in order to accrue more points.

First class points

Enough frequent flyer points could earn you an upgrade to first class. Photo by Joakim Honkasalo on Unsplash.

Cashback offers too

Some credit cards offer ‘cashback’; instead of rewards programs, where you get a certain percentage of money spent on purchases back into your account. A common number is 5%, but it can really be anywhere between 1% and 10% depending on the card and place you’re buying from.

Some cashback offers might be introduced as a way of encouraging people to spend more money, so again, be aware of whether you’re spending more than you would without cashback rewards.

The perks and features

Credit cards can provide a whole host of features that can add value to your life in ways you might never have even known existed.

Here is a small shortlist of some of the more nifty credit card features you can take advantage of. Remember that different credit cards have different features, so check what’s included before you sign up for a card.

Purchase protection insurance

Think of this feature as an insurance policy for items you’ve bought with that credit card. It provides cover for items up to a certain value for a limited period of time (say six months) and can be incredibly useful if an item breaks and you don’t have a warranty from the manufacturer.

Price protection insurance

This insurance policy allows you to claim price differences for an item you bought with your credit card provider. For example, you might’ve bought a washing machine from one store for $700, then a couple of weeks later been disappointed to notice the same washing machine selling for only $600 in a different store – if you could prove this price difference to your credit card provider, you could receive a $100 rebate.

Different card providers often have varying terms and conditions for price protection insurance, such as:

  • Number of days/months the price is ‘protected’
  • The stores may need to be within a specified difference from each other
  • Items might have to be from the same retailer
  • Minimum price differences (e.g. the provider may only provide refunds for price differences of at least $75)
  • Maximum individual refunds
  • Annual refund limits

Travel insurance

Rather than buying a separate travel insurance policy, some cards offer ‘complimentary’ travel insurance. The word ‘complimentary’ is used loosely, as these cards tend to come with higher annual fees than cards without.

Credit card travel insurance can have its limitations, such as around who it covers (i.e. not all providers will extend coverage to spouses and dependents), how long the coverage lasts and what activities it covers you for. It can also have lower cover limits and more exclusions.

According to ASIC, 20% of travel insurance policies in 2016 were activated through a credit card. 

Airport lounge access

Some premium credit cards offer cardholders free or subsidised access to airport lounges, which for some people is the ultimate bigshot status symbol.

This feature tends to be offered by cards with higher annual fees so it might not technically be free, but the added comfort can be worth your while if you’re someone who travels a lot. Any travelling companions might not be covered by this feature, and you might not get in if you don’t buy the plane tickets with the credit card.

Rental car insurance excess

This feature covers the excess you’d have to pay if the car you hired is damaged or stolen. Excesses for rental cars can be pretty big, sometimes as much as $5,000, so having this covered by your credit card can save you a fair bit of coin. Just remember to check that it’s there first.

They’re easy, fast and convenient

Cash is quickly becoming obsolete thanks to the abundance of credit cards, debit cards and digital wallet technologies: In 2016, 37% of all payments were made with cash, down from 69% in 2007 (according to RBA stats). People prefer credit cards because (a) they’re much quicker than fiddling around in a wallet for cash, and (b), they also give people access to a line of credit if they don’t have the money for an immediate purchase.

Say your car’s repair bill was unexpectedly high, but you won’t have enough cash in your savings to pay for it until payday next week. By taking advantage of your credit card’s interest-free days, you can pay for the repairs on credit then pay off the card next week on payday at no extra cost – as long as you pay it off before the due date. This can also be useful in case of an emergency, like having to pay costly hospital bills at a moment’s notice.

Of course, it’s important to have an emergency stash of savings you can dip into for these unexpected expenses.

They can be safer than cash

In addition to being more convenient than paying with cash, credit cards can be safer.

Once cash is gone, it’s gone; there’s no getting it back if a thief decides to buy a TV with it. If you notice that your credit card has gone missing, however, you can quickly call your provider and get them to cancel it. Worst case scenario is you have to pay a minor fee for a replacement card.

Even if you don’t cancel the card in time, your company will notify you of any suspicious purchases made an in your name. If mild-mannered Bill from accounts were to suddenly buy himself an absurd surround-sound system, the credit card company might verify this purchase with him.

They work overseas

While some conduct their overseas spending with the help of a travel money card or a good old-fashioned bum-bag, many credit cards are optimised for travel. Credit cards can offer good exchange rates and features for travellers and some have low or non-existent currency conversion fees, meaning you’ll be charged little for making a purchase on such a card overseas.

If you’re considering using a credit card overseas, look into the card’s currency conversion, ATM and international cash advance fees before you head off.

They can help build your credit profile

Applying for any big-ticket asset like a home or a car through a loan will require a credit history check. Lenders will view a higher score on your credit report as an indication that you’re more trustworthy as a borrower. On the flip side, a poor credit score will make it harder to get an ideal loan.

Showing strong repayment discipline with a credit card can help show potential lenders that you’re trustworthy.

A word of caution: Keep in mind that applying for numerous credit cards in a short space of time and having a high credit card limit can hurt your credit score. Lenders will assess you on your credit card limit, not your balance.

Reasons to not get a credit card

Reckless spending

Arguably the most well-known flaw of credit cards is how damaging they can be towards our bank accounts, but this is more a flaw on the impulse control of the cardholder themselves. Given how easy credit cards are to use, online purchases and bills can quickly stack up and lead to balances accruing interest if you aren’t careful – read our article on how interest is calculated for more information on how to avoid this.

Rewards programs might not be worth it

You’ll notice that the main chunk of this article’s ‘benefits’ section is taken up by rewards programs and perks attached to the card. These cards tend to be more expensive than cards without in terms of the interest rates and fees charged, and according to a recent report from the RBA, 60% of cardholders tend to overestimate the net monetary value they are receiving from such cards – with half of them incurring a loss.

According to the report, these cardholders are more likely to be motivated by points rather than fees and interest. The consumers who were found to have made a net gain on their rewards cards were high-income earners, while those who did not earned lower incomes and were more likely to use the card to borrow.

A good rule of thumb to find out what your rewards points are actually worth in dollars is to multiply the number of points you have by 0.01. If you find you’re spending way too much for too little, then consider switching to a cheaper card.

Credit card fraud is rife

Credit cards aren’t entirely safe, especially now that online payments are so common. The Australian Payments Network found in its 2016 report that credit card fraud cost $534 million that year, up from $469 million in 2015. For every $1,000 spent online, nearly 75 cents is lost to fraud.

Many credit cards now come with fraud protection guarantees which allow you to get a refund for fraudulent transactions, but this doesn’t mean you shouldn’t regularly check your statements for any you didn’t make. Be vigilant about the websites you share your cred card details with too.

Savings.com.au’s two cents

Credit cards provide consumer convenience and power when it comes to spending, but at a cost. It’s tempting to go for the flashiest card with all the perks and a juicy rewards program, but the simple reality is that these cards are not for everyone. The RBA’s report found that people with unsuitable cards could be losing up to $250 a year in costs, and that doesn’t even factor in debt accrued through reckless spending.

You should always think about who you are and what you’ll be using the card for before opening one. If your only credit card spend is about $500-$1,000 a month for things like weekly groceries and petrol, then a low rate or no annual fee card would probably be the more suitable option. On the flipside, a high-flying big-spender who travels a lot might be better off with a frequent flyer card with an attractive rewards program – these types of people are more likely to get enough value from their card to offset the annual fee.