There are lots of different credit cards available on the market but not all of them will suit your financial needs. Take time to understand how credit cards work with our no-nonsense guide – and you won’t waste money.
When it comes to choosing a credit card, the most important elements you need to consider are what interest rate it comes with, and what fees you have to pay.
But it’s also a good idea to know exactly what you want a credit card for. Is it to borrow money, to make online shopping easier, or do you want a credit card to use while travelling overseas? Identify the purpose of your credit card, then find one that meets your needs.
Types of credit cards
Standard credit cards give you a certain amount of credit to use each month which then needs to be paid back via a minimum monthly payment. They have varying interest rates.
Premium credit cards offer you some sort of reward for using them, such as air miles, cashback, or bonus or store points.
Prepaid credit cards allow you to top up your card with cash. These are popular credit cards to take on holiday as it means you don’t have to carry travellers’ cheques, pocketfuls of cash, or get charged bank fees when you withdraw money from overseas cash machines.
Compare credit cards
When it comes to choosing a credit card, it’s important to make sure it works for you.
If you are planning on using the card to make purchases but will pay off what you owe in full every month, then look for a premium card with rewards – if you pay back the balance in full every month you won’t have to pay any interest on the debt, so you won’t need a low rate.
If you need to borrow longer term on your card, or need longer to pay off your purchases, look for introductory offers on cards of 0% or as near to zero as you can get.
You can compare credit cards using independent sources online. Look at the types of cards available and then compare rates, fees and rewards with each provider.
Don’t be afraid to switch cards if yours isn’t working for you.
Credit card repayments
Always keep a record of how much you spend because at the end of the day you still have to pay it off.
Mark in your diary, or on a calendar, when your monthly credit card payment is due because if you miss the deadline you’ll get stung with late fees.
A minimum payment made each month is better than nothing at all, but try and pay the full amount off when possible.
Credit card costs
One of the most important things you need to be aware of about credit cards is the costs you can incur. If you miss a payment or you make a late payment, you’ll end up paying penalty fees and these won’t be small amounts.
You may also be charged a yearly account fee and if you use your credit card overseas while you’re travelling, expect some additional charges on your bill when you return.
Credit cards work by using compound interest, so instead of simply paying back 15% interest on whatever you borrow, you will pay 15% interest on the interest too. This means it can take years to pay back relatively small amounts if you only make small repayments.
If you have had a high credit card balance for a long time that you just can’t clear, consider switching it to a loan with a repayment plan instead.
Pros and cons of credit cards
A credit card is handy because:
- You can buy things online.
- You have money readily available.
- You can build up a good credit record.
Be careful with your credit card because:
- They have high interest rates.
- You will be penalised for missed or late payments.
- Credit cards can encourage you to spend money you don’t have.