Credit Cards: The Top 18 Benefits and Disadvantages
Posted August 6th, 2009 and last modified December 28th, 2011
Owning this shiny plastic might not be as good as it was cracked up to be.
Avoid the cost of cash advances Interest free periods are promoted with abandon but that period does not apply to cash advances. Generally you will be paying interest on a cash advance from day one. Two of the four big banks charge a fee of 1.5 per cent of the withdrawal plus interest from the very first day. That means $15 from the moment you withdraw $1000 cash on your credit card, whereas some other providers are charging up to 27 per cent for cash withdrawals. Check out what you are being charged.
Select the card to suit your purposes There are various options offered with credit cards so make sure that the card you choose suits your spending pattern. If you are going to be paying off your card each and every month you could use a higher interest rate card and this could offer you up to 62 interest-free days on purchase, as well as rewards, discounts and frequent flyer points. Reward cards need to be researched because if the fees are high, they may not be worth having. On the other hand if you are going to use the credit card for extended credit (say to buy a car) and do not pay off the balance each month, then you need to find a card that has a low interest rate. It is quite possible this may not have an interest-free period but you will get the benefit of the lower interest rate over the long term.
Have you heard of a ‘relationship discount’? When a client consolidates their banking business with the one bank or credit union it is quite possible that you will get offered various discounts, fee waivers or credit card annual fee waivers. This could work out to be a substantial sum.
Annual fee waivers apply at certain times Other fee waivers that you could be eligible for are on the annual fee if you spend a certain amount each year on your credit card. It could be that if you spend $10,000 a year on your credit card you can get other benefits and also avoid the annual fee. Westpac is one issuer which tends to reward its loyal customers with these annual fee waiver on its credit cards. What needs to be controlled here is what you spend your money on, so don’t spend for the sake of spending just to make $10,000 worth of purchases or you could find yourself not being able to pay it off.
Not all offers are as good as they sound When choosing your card, take note of the introductory offers. They may sound enticing but check that in the long run they are going to be of benefit and that they are not going to cost more at a later date. The three main areas to concentrate on are: the standard interest rate, interest-free period and annual fees. Evaluate the offer and the total of ongoing running costs of the card before making a decision.
Unexpected card fees can mount up What you may not be aware of is the ancillary fees that sneak up on you and often without you even being aware it is happening. Fees like late payment, exceeding your credit limit, having a payment refused, an extra card on the account, replacing a card and now the extra cost of overseas ATM withdrawals. There are other costs as well and these costs can all add up to a substantial amount each month and they can range from $4 to $90.
Interest-free periods do have rules and regulations To get the benefit of not paying interest on money that you have used on your credit card, you must pay off the full balance each month and pay it on time. If the card is not paid in full but just the minimum amount due, you will be charged interest back until the date the item was purchased. The balance of the card must be paid in full BEFORE you will get the benefit of an interest-free period on current and further purchases. It would pay to organise to pay your card off as soon as it arrives.
Banks are not the only card providers Traditionally banks were our source of finance but now there is a huge range of finance providers: credit unions, community banks, building societies and more. Quite possibly these institutions will offer a better interest rate on your card as they may be a non-profit organisation. It is a competitive market so do your research and find out if you can get a better deal.
Loyalty cards can be expensive Store cards like Myer and David Jones should, like other credit cards be paid in full each month if possible. The interest rates on these cards are usually substantially higher than other cards. The benefit of them is that you get discounts, special buy opportunities, added warranties and extended credit, but all this is only worthwhile if the cards are religiously paid off each month.
Manipulate your low interest card for your benefit If you are in the situation where you are not paying your card off each month, check out that you have the best possible credit card under these circumstances. Compare your interest rates. It is very competitive in the lending market and the chances are you could change cards, get an interest-free period on a balance transfer and still have a lower interest rate at the end of the interest-free period. There are many cards in the market place with interest rates in the vicinity of 9%. It is quite possible that you could save up to 10% in the first year alone, in other words $300 on $3000 revolving credit.
Pay more than the minimum each month to reduce debt Avoid the trap of only paying the minimum amount off your credit card each month. Over the years credit card companies have kept the interest rates up, but most have dropped their monthly repayments. This means that you are not in effect paying much at all off your card. Try and pay off more than the minimum each month so that you are reducing down the payment. If you find that you are not getting the balance reduced at all it would probably be the time to look at a personal loan at a lower interest rate.
Reward programs, can you afford them? Reward programs have been very popular but the time has come for change. Reserve Bank reforms have meant that credit card providers are now heavily charging those customers who want to be in reward programs. The privilege of having a reward system for a card holder has become less attractive and really should only be kept now if you can ensure that you are going to get the benefits. Such are the higher fees and the lower points being awarded, that one needs to really sit down and work out if it is worth being in the reward system because it could be costing you a lot more than you are getting back from it.
Internet banking needs top security processes It is no mystery that online banking fraud is on the increase. As much as steps are taken to reduce it, the consumer still has to take precautionary steps as well. If you transact on the internet take note of the following security tips:
Secure your computer
Do not use the ‘remember my password’ option to bank accounts on the computer
Change your password regularly
Don’t ever send credit card or bank account details via the internet Reject any emails in any way shape or form that ask for your bank details
Log out of your bank site each time you use it
- that does not mean hit the ‘X’ button, that means go to ‘LOG OUT’ and close the site first Only deal with recognisable merchants Look for the small padlock at the bottom right of your browser and click for details When you are buying from a new site deal on a small basis first Read a company’s privacy policy before buying online Always check your accounts frequently and report discrepancies If you have any problems with any card or account, close it immediately
Try using a debit card for more control The use of a debit card will give you all the convenience of a credit card without the extra costs. A debit card is linked to your savings account and funds are withdrawn from your savings account on purchase. It is possible that you may be able to have a debit and a credit card in one.
Beat the banks at their own game with two cards There is a way to beat the system and that is by using two cards to their best benefit. Usually cards offer either interest-free periods or lower interest rates, not both. For this reason if you use your interest-free card for your purchases, then don’t have the ready cash to pay it in full on the due date, you can use a cash advance from the low interest rate card to pay it off and prevent interest charges. This means that you have made full use of the interest-free period, but for rolling over the balance you are using the lower interest rate card.
Credit card purchase can save bank fees Another way to save on bank fees is to use your credit card (no fees on charges) rather than use a savings card, then at the end of the month just use one transaction fee to pay off your credit card.
Be aware of interest rate charges on your card Something that has crept into the charge rates on cards too, is the use of different interest rates on the purchases and cash withdrawals. There will be a widely advertising rate at the top of the statement but if you make cash withdrawals there could be a significantly higher interest rate charged, even as high as 27 per cent. Of course, these cash advance charges are not interest-free and are charged from the day of the withdrawal.
Balance transfers have a ‘revert rate’ so watch for the date.
As in any commercial situation customers are always being enticed to switch and as with credit card providers you are enticed with ‘balance transfer’ offers. At times these rates have even been as low as 0 per cent. A balance transfer rate usually lasts from 3 to 12 months. This means that you can transfer your other credit card balance to the new card with nil interest being charged but what does need to be carefully noted is the date that the transferred balance reverts to the usual interest rate charge. Another point to note is that if you put new charges on the new card during that initial period you will be charged interest on them as per normal – these new purchases are not interest-free. Paying 17 – 19 per cent on a credit card is not necessary any more, so make enquiries about transferring your funds if you are on a high interest card.
Card Comparison Resources
http://www.creditcardfinder.com.au/low-interest-rate-credit-cards
http://www.creditcardfinder.com.au/australian-reward-credit-cards
http://www.creditcardfinder.com.au/debit-cards
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