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Are credit cards worth it?
A credit card could be a convenient way to pay for purchases, earn rewards and build credit when used responsibly. At the same time, credit cards could also lead to financial stress if you don't understand how credit card interest works or use your card to pay for things you can't afford.
Learning about the pros and cons of using a credit card and evaluating your financial goals and spending habits could help you determine whether getting a credit card is a good idea for you.
Do you really need a credit card, and is it worth getting one?
Many Australians can easily survive without a credit card if they do not need access to additional credit on top of their regular earnings. That being said, having one (or more) may have its advantages.
In its simplest form, a credit card simply allows you access to a line of credit. This means it can come in handy during an emergency, such as when you need to pay an unexpected medical bill and don't have enough cash.
Some credit cards provide competitive rewards programs, cashback offers and perks for cardholders. Depending on the card you choose, it's possible to gain access to concierge services, complimentary insurances, as well as cash back on purchases and more. You may also be able to earn points for the money you spend that may be exchanged for goods and services as well as plane tickets and flight upgrades.
In some situations, a credit card may be the only form of payment approved for a booking. You may run into some car rental companies or hotels that don't accept debit cards when you make a booking. And if the company does take debit cards, you may need to pay more than just the booking cost as a security deposit, meaning using a credit card could save you money.
On the other hand, it is well known that when used incorrectly, cardholders can easily accrue debt that can take years, if not decades, to pay off in full. If you cannot afford to repay your credit card balance in full each statement period, you may easily see your debt snowball out of control. Especially if you opted for a higher rate credit card, or one with costly ongoing fees.
In general, having a credit card could be helpful in some situations, but whether you need one or if it's worth having one depends on your financial goals and habits.
What are the pros and cons of getting a credit card?
A credit card could be a helpful tool for managing your finances. Still, it could also lead you into a debt spiral or hurt your credit score if not used responsibly. It’s useful to learn about the benefits and drawbacks of having a credit card before applying for one.
- A credit card may be a convenient way to pay for purchases. Some cards also allow you to pay for big purchases in interest-free instalments spread across a few months, making it easier to plan your household budget. However, you could be hit by a late payment fee or high-interest charges if you miss an instalment or fail to keep up with the repayment schedule.
- Some credit cards offer rewards programs that allow you to earn cash back, points, or miles for purchases made on the card. Some cards may offer additional benefits like complimentary travel insurance, rental vehicle excess insurance, and even price protection insurance.
- Paying off your credit card debt regularly and clearing the balance in full each month could help you build your credit score. This would put you in good standing when applying for other credit products, like a home loan or a personal loan.
- Most credit cards offer an interest-free window, giving you 40-55 days to pay your credit card bill. It means you have a grace period of 15 to 20 days after your bill is sent to settle your balance before it accumulates interest. You can also find balance transfer credit cards that offer interest-free periods ranging from six months to up to two years. These can be used to consolidate and repay your debts without accruing interest.
- Credit cards make spending money you don't have much easier. If you're someone who finds it difficult to control your spending, consider opting for a prepaid credit card so you don't end up overspending and land in debt that causes financial stress.
- Using a credit card could be rewarding for somebody who pays off their balance in full each month. But if you struggle to pay your monthly credit card balance, you'll be charged interest, which could be as high as 25 per cent. This will continue to accrue if you’re not able to clear the balance, which can lead to further debt that can be hard to escape.
- Some credit cards may come with various fees, including annual fees, foreign transaction fees, reward program fees, cash advance fees, and late fees. To ensure that the costs of using a card don't outweigh its potential benefits, comparing both aspects before applying for one is essential.
Consider your spending habits
While credit cards offer a convenient way to make purchases and earn rewards, they may be quite expensive if you choose a card that's not right for you.
For example, some frequent flyer credit cards offer lucrative rewards but may also charge a relatively high fee compared to basic credit cards. If you're a high-spender, you'll likely accumulate points quickly and could use them for travelling to offset the fees paid for the card. That could be a win-win!
However, if you only use the card to pay for minor expenses like groceries and petrol, you're unlikely to earn enough points to redeem for anything worthwhile. You might pay much more in fees than the worth of the rewards you earn.
So, consider your spending habits and financial goals before signing up for a credit card. You’ll need to choose a card that offers rewards and benefits that are relevant to you and doesn’t cost you more money. Also, ensure you read the fine print and compare the fees, interest rates, and rewards to find the best option for your needs.
If you're struggling with debt or have an irregular cash flow, there may be better solutions than applying for a credit card. Instead, you may benefit from speaking to a financial counsellor to figure out ways to get your finances on track.
Remember, while a credit card could be a helpful tool for managing expenses, it is another form of credit that must be repaid on time.
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Product database updated 05 May, 2024
