Credit cards can be polarising.
Some people swear by them and use them in a way to reap all potential benefits on offer. Other people warn against a device that gives people access to credit they might not be able to properly manage.
We take the view that credit cards can be a useful tool in your wallet’s arsenal, as long as you know how to use it correctly.
Here is our ‘Jargon-B-Gone: Credit cards simplified’ tutorial to help you towards credit card peace of mind.
When you make a purchase on a credit card, you are obtaining a small, personal loan from your credit card provider.
In return, you may have to pay an annual fee, or if you don’t repay your balance off in full by the due date, you may be charged interest as well as a late payment fee. It’s important you are familiar with the relevant fees and charges applicable to your credit card.
Lending money comes with the risk that the borrower is unable to pay the money back. For that reason, credit card providers will assess the credit history and financial situation of all applicants to determine whether they will be approved and the level of credit they will provide.
Google ‘credit cards Australia’ and you’ll find plenty of options to choose from.
So what should you bear in mind when considering a new credit card?
Rates and Fees
Many cards have an annual fee (although some don’t, such as the Virgin Money No Annual Fee credit card), which is exactly what it sounds like. Much like a subscription to a magazine membership or something similar, many credit cards requires an annual payment to remain active.
Applicable rates and fees will also vary from card to card.
When you make a purchase with a credit card, you are effectively borrowing money on a short term basis. That’s why interest will be charged on the balance. Though many credit card providers offer limited interest-free periods, generally interest will be charged to your balance if it is not paid within the specified time frame. If you want to avoid this, you will need to pay your balance by the due date. A brief description of common interest rate charges is set out below:
- Purchase Rate: The interest charged on regular credit card purchases.
- Balance Transfer Rate: The interest charged on balances transferred from other credit cards, store cards or even personal loans. For a visual demonstration, check out our Balance Transfer Calculator.
- Cash Advance Rate: The interest charged after you take cash out of an ATM with your credit card.
Fees differ quite significantly across credit cards, but there are several instances where fees may be payable. These may include late fees, dishonour fees, cash advance fees, foreign currency exchange fees, over limit fees and more.
When choosing a new credit card, make sure you are familiar with the interest rates and fees applicable to each, so you can decide which will suit you best.
Purchasing new things is one of the great joys of a credit card, but you need to remember to spend wisely.
Know your limits
Every credit card account has an upper limit. This is the maximum that can be charged to your account, including interest. If it is too low and you need more room to move, or it is too high and you’re worried about overspending, talk to your credit card provider and they might be able to adjust it, depending on your individual situation.
Make sure you know your personal limits, too. Do your budget to make sure you can pay back purchases as quickly as possible to minimise or avoid interest and fees.
How to use a credit card
Credit cards will generally have one of three elements involved with paying: A signature, a PIN number or a security code.
- Signature: Old-school magnetic-strip cards utilised signatures to verify a point-of-sale purchase. While PIN has become mandatory in Australia, some retailers may still require a signature (especially overseas).
- PIN: Much like an EFTPOS card, your credit card will have a secret PIN number that only you should know. You will use this during point-of-sale purchases, or at an ATM machine.
- Security code: Alongside your credit card number, many cards have a three-digit security code for use during online payments. It is generally located on the back of the card.
Paying it back
After making those purchases whether online or otherwise, you need to pay the balance. Each month you’ll receive a credit card statement, which lets you review your current balance, the due date of said balance and what minimum repayments are due.
- Minimum repayment: This is exactly what it sounds like. It is the minimum amount you have to pay each statement cycle. To avoid incurring too much interest, however, it’s generally wise to pay more, so the total balance is paid off sooner.
If you still need help choosing a credit card, Virgin Money has put together a handy guide to help you ask the right questions to work out the type of card that might be right for you.
How do you feel about credit cards?