Credit Cards Explained

How to choose a the best credit card for you

Choosing a credit card often requires a bit of research on your behalf, as the number of products available on the market can appear endless.

First and foremost, it’s important to consider your needs when choosing a credit card - whether those include a low interest rate, no fees or frequent flyer points to help you jet off overseas sooner.

Types of Credit Cards

You’ll find a list of the different types of credit cards available below to help you navigate the market and narrow down your options.

Low rate credit cards

Low rate credit cards come with, you guessed it, a lower interest rate compared to other credit cards. These cards usually have no frills, meaning they are often quite basic without additional features such as rewards programs or complimentary insurances.

A low rate credit card may save you money on interest, yet if you carry a significant credit card balance from month to month, the interest bill can still be quite significant. Also, you may still be charged annual fees depending on the card.

Low and no fee credit cards

Similar to low rate credit cards, low or no fee cards come with pared-back features. Ultimately, what you gain by paying little or nothing in annual fees, you give up with limited credit card features.

Even without an annual fee, it’s important to remain on your toes as other costs such as interest, currency conversion fees and even cash advance fees for withdrawing cash can add up.

Credit cards with low or no annual fee may be appealing to people who only have a credit card for emergencies and use it sparingly.

Rewards credit cards

Being rewarded for spending money may sound too good to be true, yet reward cards can be an effective way to benefit from regularly spending on your credit card.

Rewards can come in a number of different forms depending on the type of card including fuel and grocery shopping discounts, store discounts, gift cards, flights, accommodation and seat upgrades, and frequent flyer points.

Rewards credit cards are typically considered as more ‘premium’ products than low rate or low fee credit cards as they provide greater incentives to spend. This incentive however, often can mean higher interest rates or fees.

Frequent flyer credit cards

Similar in nature to rewards credit cards, frequent flyer credit cards provide perks in the form of points linked to airline frequent flyer programs. These points are accumulated over time and are typically redeemed for flights or holidays.

Other associated perks for cardholders can include travel insurance and complimentary access to airport lounges. Like rewards credit cards, frequent flyer cards can charge higher annual fees and higher interest rates than low fee and low rate cards.

Balance transfer credit cards

Many credit cards offer balance transfers, which essentially allow existing credit card debts to be transferred onto them. Typically, this debt is accumulated from a credit card with a different provider.

The transferred debts are charged a balance transfer rate, which is usually much lower than the purchase rate - often as low as 0% p.a. However, this lower interest rate generally only applies for a limited period of time before reverting to a much a higher rate.

Premium credit cards

As the name suggests, premium credit cards offer extensive ‘premium’ benefits to customers, including concierge services and complimentary insurances. Providing a number of exclusive services to customers, these cards tend to come with higher rates and fees.

You may find that these cards are likely offered by banks exclusively to higher income applicants. Banks will typically use tiered systems to determine if you qualify.

Comparing credit cards

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.

How do credit cards work?

While credit cards can be used to purchase products and pay for services, its important to note when the card is used, that money will need to be paid back.

Let’s say you apply for a credit card with a bank offering a credit limit of $10,000. As the limit is set at $10,000, this means you can borrow up to $10,000 each month. Any money you borrow needs to be repaid to the lender within a certain payment period. If it isn’t, you’ll be charged interest on the unpaid debt.

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. However, interest costs and fees can potentially catch you out.

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Credit card fees

Depending on the type of card and the way in which it is used, there are a number of fees associated with using a credit card - some of which are outlined below.

Annual fees

It’s often that your credit card, no matter how often you use it, will charge you an annual fee. For the likes of rewards, frequent flyer and premium cards, this fee can be a hefty expense. You may find some credit card providers will waive the annual fee for customers in certain circumstances. These include spending above a certain limit or making repayments consistently.

Cash advance fee

Cash advance fees are charged to your credit card if using your credit card to withdraw cash from an ATM or transfer credit to another account. This is charged as a percentage of the amount withdrawn, typically between 2-5%.

In addition, a special interest rate applies to any cash withdrawn using your credit card. This is often higher than the card’s purchase rate and applies as soon as the money is withdrawn. Importantly, there are no interest-free days on cash advances.

Late repayment fee

As the name suggests, if your credit card repayments are made late, you are likely to be charged a late fee by your credit card provider. This fee is an additional fee that will be charged to the outstanding card balance.

Currency conversion fee

Currency conversion fees are charged when using your card to make a purchase in a foreign currency. Similar to late repayment fees, the currency conversion fee is typically charged as a percentage of the purchase amount.

What features do credit cards offer?

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:

1. 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.

2. 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.

3. Airport lounge access

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.

4. 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.

5. 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.

6. 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.

7. 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.

Credit card networks

When it comes to navigating the credit card market, there are a number of different payment platforms available, each with their own advantages and disadvantages. The most common platforms for credit cards are Visa or Mastercard, yet others include the likes of American Express or Diners Club.

In Australia, often you will find that Visa or Mastercard credit cards are accepted at most outlets. Platforms such as American Express of Diners Club are not accepted across all outlets, as the merchant has to pay a higher fee for customers making transactions with these cards.