Credit cards these days are harder to navigate than ever before. Which rewards scheme is best? Do I need travel insurance from my card? What about annual fees?
Finding your way through the credit card maze to arrive at the card that best suits your personal needs can be exhausting, especially when the credit card companies are constantly bombarding us with advertising about their products. So let’s look at some the factors that can help you choose the best credit card for you.
Why do you want a credit card?
Credit card companies aren’t charities. They want your money, preferably as much as they can get. They mostly do this by charging you annual fees and interest on your unpaid balance when you don't pay off the full amount owing each month.
That's not to say that credit cards can’t be helpful when used sensibly. They’re handy when you're short of cash or just don't want to carry a lot of cash with you. They're a convenient way to pay for everyday things like shopping – but that convenience also comes with a cost. For example, research has shown that people often spend more when using a credit card than when they use cash.
So before you apply for a credit card, think about why you want one, how you will most likely use it and, especially, how you will pay for it. Will you use it every day, or just for emergencies? Will you pay off your balance every month, or just the minimum? How important are rewards or frequent flyer points?
It's not ideal to use a credit card to pay off other debts because a high interest rate, plus other fees and charges, could end up costing you even more in the long run. So if you are having trouble with debt, you might do better to consider a no-interest or low-interest loan, or seek advice from a financial adviser, rather than get a credit card.
Getting started – types of card
So, if you’ve decided to go ahead with getting a credit card, let's start with a few basic points:
Interest-free credit cards or balance transfer deals can be tempting – but remember that the interest-free period is for a limited time only. If you still have an unpaid balance on your credit card when the offer ends, your interest can jump significantly.
Low-interest-rate credit cards usually charge higher annual fees. If you're prepared to accept those higher fees, this type of card can be useful (for example if you purchase often with your card or intend to borrow on it). Paying an annual fee can also make better financial sense than paying a high interest rate, especially if you only make the minimum payment each month.
Rewards cards can also come with high annual fees, and they can end up nullifying the rewards benefits. You'll often have to spend a lot to really earn substantial rewards points.
Other fees and charges
Another thing to consider when looking at credit cards is the fees and charges, which can add a lot to the cost of your card. Look, for example, at whether any of these are included:
- Annual account-keeping fees
- Fees for late payments
- Cash advance fees (on top of interest on cash advances)
- Fees for exceeding your credit limit
- International transaction fees
- Fees for using reward programs
As mentioned above, consider which fees and charges you might be willing to accept in exchange for other features of the card that you want.
Some credit cards attract a surcharge on purchases, which some retailers might then pass on to you. You’re entitled to be properly informed about any surcharge before you pay. If the surcharge is compulsory, then the retailer must clearly display the surcharge alongside the price. Where the surcharge is optional, then the retailer must inform you of the surcharge, as well as any other payment option that allows you to avoid the surcharge.
A few words about rewards
Do you charge everyday purchases like groceries, petrol and bills to your credit card? Do you pay down your balance each month? If so, a rewards card could help your money work harder.
Each time you use a rewards card, you’ll earn points that can be redeemed for rewards. Common rewards include:
- Cash back – Exchange earned points to reduce the balance you owe
- General rewards – Redeem rewards points for things like gift cards or magazines
- Instant rewards – Receive automatic discounts with participating merchants (for example, $10 off at the supermarket when you reach a certain number of points)
- Frequent flyer – Redeem rewards points for airline tickets and upgrades
- Concierge service – An on-call service to handle requests such as booking a restaurant or tracking down a product
Because of the extra benefits, rewards cards usually have higher interest rates and annual fees than other cards. Think how often you would use the card to decide whether the benefits outweigh the extra cost for you.
Also, think about the types of benefits you’d like. There’s no point getting a card with instant rewards for retailers you never visit or for travel perks you don’t have time to use.
Also, be sure to compare points and fees across different programs. For instance, one card with a lower annual fee might require a huge amount of spending to get any useful rewards, while another card with higher annual fee might only need a small amount of purchases to get a reward.
Comparing credit cards
Of course, an important part of making a choice of credit card is comparing the features of different cards to find the one best suited to you.
One way to compare different cards is to use the 'key facts sheet' that should be available from all credit card issuers. These contain information on:
- Minimum repayments
- Interest rate for purchases and cash advances
- Interest rate for balance transfers
- Promotional interest rate (if any)
- Interest-free period (if any)
- Annual and late payment fees (if any)
Also, comparison websites can be useful to weigh up the features and fees of different credit cards. They are especially helpful for:
- Identifying the features you want to compare (e.g. interest rates, fees)
- Shopping around – The issuer’s websites and comparison websites can help you compare key features
- Making a short list of potential cards, based on your research
- Getting more detail – Once you have narrowed your choice down to a few cards, look at the relevant product disclosure statement (PDS), key fact sheet or other document outlining all the features of the card
However, when using comparison websites, it’s worth remembering that:
- Comparison websites make money in various ways, sometimes through sponsored or promoted links
- The search results may show sponsored links ahead of non-sponsored results that may offer a better deal
- Some comparison sites only cover a portion of the market, not the whole market
Once you've settled on a choice, contact the card issuer and ask any remaining questions until you have all the information you want.
With just some basic research like this, you should be in a good position to apply for the card that best suits your personal needs and habits. That way, your card has the best chance of working for you, and being a convenience rather than a headache.
*The phrase ‘some of the best’ is not a recommendation or rating of products. This page compares a range of credit cards from selected providers, not all products or providers are included in the comparison. No credit card is one size fits all. The best credit card for you will not be the best credit card for someone else. As a result, it's worth getting advice on whether a product is right for you before committing.