Credit cards can often be a tricky thing.
Do I get one?
Do I need one?
What can I get out of it?
How much is it going to cost me?
We’ve tried to simplify the whole concept that is the credit card.
Below we have listed the benefits and disadvantages of owning a credit card, to help you establish if it’s the right move for you.
Benefits:
Free travel insurance
This is an incentive that a lot of credit card holders are looking for when applying for a credit card. Many credit card companies offer this to their gold or platinum credit card holders, however other providers have also recently begun offering this on condition.
Frequent flyer points
A lot of credit cards offer this as an incentive. It may be a lump sum for signing up for a credit card, or per purchase. Be aware that these can add up, and they do hold financial value.
Cash back
Some credit cards are cash back credit cards. This means that for every purchase you make (inclusive of other limitations and conditions, such as number of purchases, to a particular spending amount or time restraint) they may offer a percentage of those purchases back.
Discounts on products
Some credit cards have associations with other businesses. This means they can offer discounts on particular goods and services.
Reward points
Similar to frequent flier points, however rewards points may be used to purchase limited items or attain discounts.
Convenient
For daily purchases and online shopping it also allows you to have access to another stream of income. If there is something that needs to be paid, eg. Bills or an important purchase, and you don’t have sufficient funds, than a credit card is an option that will allow you to pay these necessities without receiving insufficient funds fees from your bank on your debit card.
Safe –
Credit cards are a safer option than cash. They often provide insurance for the purchase of some goods and have fraud protection for stolen cards. It is also very easy to cancel a card and come with several levels of protection.
Good credit rating
It can help improve your credit rating or establish you a good one if you continuously make your payments and not miss them.
Pay off monthly balance in full = no interest
Disadvantage:
High interest rates
Credit cards often have the highest interest rates on loans. The average in Australia can often range from 15-22%. This means that if you can’t repay your credit card balance in full by the end of the month than you are open to these high interest rates. This often means that you are going to be paying more for your product or service than what you originally would have.
Overspending
Spending money that you don’t have gets you into deep water. If you have a regular and stable income, and budget right, then paying off your credit card balance won’t prove to be too much of an issue. However, when your debt is larger than your income after expenses, then it can lead into a slippery slope.
Impacting credit score
If you miss a repayment or cannot meet the minimum repayment requirements then this can negatively impact your credit rating. This can therefore effect your ability to apply for a loan in the future.
Credit card surcharge
This is a fee that business have to pay to their banks for the benefit of allowing customers to pay with their credit cards. Many business these days are choosing to pass this surcharge onto customers. This means that you may end up paying anywhere from 1-3% of the purchase price.
Annual fees
Many credit cards will offer a ‘no annual fee for the first year’ as an incentive, however these prices can often increase quite rapidly. Some credit cards may offer a lower annual fee for a higher interest rate and vice versa. This annual fee however means that you can end up paying an additional $500+ per annum just for the convenience of owning and using a credit card.
Credit cards can be beneficial when used in the right circumstances and the right methods.
For more information about how to effectively use your credit card to get the most out of it, make sure you read our next upcoming blog!
Note: This is only advice, for specific information please contact your bank or financial advisor.