Choosing the right credit card
Friday, 02 December 2011 13:51
Last year the Reserve Bank of Australia reported that in 2010 Australia was the world leader in personal debt, even overtaking the usual credit-hungry U.S. Not surprisingly, next to mortgages and various personal loans, credit card debt comprises a large part of our collective $1.2 trillion debt, averaging at $56,000 per adult.
Credit card debt has risen 42% in the past five years, currently coming to an average of $3,321. Today there are more than 14 million credit cards in circulation in Australia, with almost every adult owning at least one.
With so many types of cards on the market, which type is right for you?
There are many types of cards out there in the market and if you do not have the right card, you could end up paying far more interest than you need. This article is designed to help you make the right choice.
Reward Cards
A lot of people are attracted to the rewards and benefits that many credit cards offer. From rewards points for every dollar spent, to free flights, gifts and even cash-back. It is obvious that the temptation is hard to resist. However, did you know that these rewards and benefits nearly always attract a much higher interest rate and substantial annual fees?
Reward cards are appropriate for those people who are able to spend enough on their card to earn a sufficient quantity of reward points to enable them to exchange the reward points for goods and services that they value (the number of reward points needed can be substantial).
More importantly, as these cards often charge high interest rates and encourage spending, it is important that reward card holders can budget well, so that they can ensure they pay off their balance in full each month and not incur high interest charges (which often will be applied from the date of purchase).
Low Balance Transfer Rate Cards
Most credit cards have a minimum repayment of 2% each month and unlike most other types of loans, there is no time period to pay it off. This becomes dangerous for some people as they can get caught with a never-ending debt. Cards that offer a low rate for balance transfers are therefore attractive, but did you know that with many of these cards, if you make a purchase during the balance transfer period you often end up paying the full interest rate? Low balance transfer rate cards can also attract a high interest rate at the end of the balance transfer period.
Low balance transfer rate cards are appropriate for those people who do not need to use their credit card going forward and who are comfortable that they can make regular payments to eliminate the balance before the end of the balance transfer period.
Low Rate Credit Cards
Low rate credit cards tend to come without a rewards program and therefore a lower interest rate and lower annual fee.
Low rate credit cards are appropriate for those people who actively use their credit card and value interest free days but do not want or will not benefit from a rewards program.
For those individuals who carry a balance each month, the lower interest rate obviously attracts a lower interest charge, however for those struggling to reduce their balance each month, a personal loan may be more appropriate.
VISA/MasterCard Debit Cards
VISA or MasterCard Debit Cards provide you with the ability to shop online using your own savings. However, many debit cards can be attached to an overdraft facility providing the benefits of a credit facility. Interest is charged only on the amount of overdraft used but will often not attract the interest-free period associated with the other card type.
Debit cards are appropriate for those individuals who wish to access their own savings and do not need the extra features such as interest free days or reward programs.
So how do you keep your card costs to a minimum?
Firstly, establish your spending and repayment patterns. This will help you understand the type of card you need.
Ask yourself these questions:
- Do I need my card to transact online or do I also need the credit?
- Do I repay my balance each month?
- Do I have savings?
- Do I spend enough each month to justify a rewards program?
- Am I disciplined? Do I only spend what I know I can afford to repay?
Secondly, ensure you are looking at the big picture.
If you can't pay off your full card balance each month and have savings in the form of a savings account, term deposit or equity in your home, you can use this to reduce your debt.
Thirdly, choose the card(s) that suits your spending and payment patterns.
If you only use your card for irregular convenience purchases of petrol, take-aways or the occasional small purchases and do not need the added benefits such as reward programs, it is probably not worth paying a fee for a rewards card. Stick to a low interest card or a debit card.
If you want the benefits of a higher interest rate rewards card, and you aim to pay in full by the due date, choose the one which offers the lowest annual fees or best benefits to suit your lifestyle such as travel rewards etc.
If you have found yourself struggling to pay off your credit card debts, consider a balance transfer to a low balance transfer card or personal loan.
