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Smart Money

Common Credit Card Myths Explained

Last updated

Pauline Hatch      

Credit cards are used by pretty much everyone, from big spenders to the financially frugal and those heading towards struggle street. Today, you don’t even need to go to a bank to get one; just go to your local supermarket.

But while you and almost everyone you know probably have several credit cards in your wallets, there is still a lot of confusion about how they actually work. Are you supposed to pay the balance in full? Does “55 days interest free” actually mean you won’t be charged interest for 55 days? What about balance transfers and credit card debt?

There are all kinds of questions people have about credit cards that go unanswered, and the result is a whole lot of mystery and myths about plastic. This guide aims to break down some of the common assumptions about credit cards so that you can figure out what is really going on. From credit card debt to rewards, credit scores and everything in between, here’s the truth on some very big credit card myths that could change the way you use them for good.

1. You can deal with debt by cutting up your credit card.

While it would be nice to solve debt by cutting up a credit card, unfortunately this type of action doesn’t do much at all. You will still have an active credit card account, and still be able to use your card for electronic transactions. Plus the balance on the card will continue to accrue interest.

The “cut up your credit card” myth stems from financial advice that has all the right intentions – but the wrong message. It’s not the act itself that helps, but the fact that cutting up a card could stop you from using it for further purchases. So rather than cutting up a card, the key is to stop using it and focus on actively paying down the balance. And when you don’t have a balance and want to get rid of your credit card, make sure you cancel the credit card account before cutting it up so that you don’t end up dealing with annual fees and other charges down the track.

2. Having a credit card means that you have debt.

For some people, credit cards are synonymous with debt and bad financial habits. That’s not necessarily true, however: you can have a credit card for convenience, flexibility, or as a financial backup and still be debt-free. The key is how you manage your available credit.

As Westpac explains in its guide to understanding credit cards, your credit limit dictates how much you can put on the card, but it doesn’t mean you have to use it all.

“When you apply for a credit card, you have the option of nominating your preferred credit limit, or the maximum credit limit available to you based on our assessment of the information you provide in your application,” Westpac says. You can then choose how and when you use your card – so you could have access to an extra $5000, for example, but unless you use it (and carry a balance) you will also be debt-free.

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3. You are meant to carry a balance on your credit card.

Some people think that having a credit card is an invitation to buy things and pay them off over time – also known as carrying a balance. While credit cards do make this process a possibility, issuers and financial advice services recommend that you pay the balance in full every month.

“If you pay your closing balance in full by the payment date, not only does it save you interest charges on the purchases you made that month, it gives you interest-free days for purchases you make in the next month,” NAB says, adding that you should pay the balance in full whenever you can, rather that relying on the recommended “minimum repayment.

“While only making a minimum payment can give you the flexibility to make purchases and could be useful for a short period until you can pay off your card balance, it is only the bare minimum you have to pay to meet the obligations of your credit card’s contract.”

So even though statements and the actual structure of credit card facilities make it easy to carry a balance, you are always better off paying the full amount owed when you can.

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4. If your balance transfer application is approved, you will be able to cancel the old card straight away.

This statement is definitely a myth and there’s a few reasons why it doesn’t work. For starters, balance transfer approval takes time – there’s the initial approval, of course, but then you have to activate the new card and then wait for the issuer to transfer the balance from your old credit card to the new one. That process alone can take up to four weeks.

The other thing to consider is whether or not the full amount of your balance has been approved for transfer. Credit card issuers only allow you to transfer around 80% – 90% of your credit limit, so depending on the limit of your new card, it could end up being just a partial transfer of your debt.

If you tried to cancel your old card before these conditions were met, you’d come up against all kinds of problems with your old issuer, so make sure you wait until everything is clear before taking steps to cancel any cards.

5. Introductory interest rates are a solution to credit card debt.

These days there are a lot of great low and 0% interest rate credit card offers that seem like an easier way to deal with credit card debt when compared to just sticking it out with the average purchase rate of 17%. But these low rates are only offered for an introductory period, and revert to higher rates at the end of this time.

If you still have a balance at the end of this period, you’ll also end up paying more interest and could even end up in more debt. So it’s important to develop a budget and repayment plan to really get the most out of low introductory credit card rates.

6. All credit cards come with interest free days.

While it’s true that most credit cards offer interest free periods of up to 55 days, this feature is not available for every credit card user. Interest free days are typically available for people who pay off their balance in full every month (for at least two consecutive months).

So if you have a balance transfer, currently carry a balance or have not paid off your card in full during the past two statement periods, interest could be applied to any charges that you make. If you’re unsure, though, check with your issuer to find out whether or not you can take advantage of this convenient feature.

7. Your standard interest rate never changes.

Almost all credit cards in Australia have variable interest rates, which means that they can change at the issuer’s discretion – even if they are listed as “standard”. Some of the reasons rates could change include updates to the official cash rate, bank or issuer performance, and even your own credit history.

Another thing to be aware of with credit card interest rates is that there is more than one standard rate. As well as your purchase rate (which applies to most but not all transactions), there is the “cash advance rate” that applies to any transactions deemed to be cash advances (such as ATM withdrawals or gambling transactions). Your issuer could also have a separate “balance transfer rate”, typically the same as the cash advance or purchase rate, so it’s important to check all of the interest rates listed for your account whenever you get a statement.

8. Credit scores or credit ratings don’t apply in Australia.

Lenders use credit scores or credit ratings to assess your eligibility for a range of products, including credit cards, personal loans and mortgages. But as credit reporting agency Equifax points out, credit ratings are “not common knowledge in Australia”.

“Banks, mortgage insurers and mobile phone companies are just a few examples of credit providers and lenders who may check your credit file,” Equifax says.

“They will typically do this when you apply for credit, and their decision whether to accept your application depends on the lender’s individual guidelines and criteria.”

With details such as overdue debts, default payments and legal issues, as well as “positive” information such as on-time payments, your credit file is a powerful resource for lenders, so it is useful to check what’s on there when you want to apply for a credit card or other kinds of finance.  You can get a free copy of your credit file from Equifax,  Experian, and Illion once every year to see what details are recorded and make sure there are no mistakes.

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9. Your income affects your credit score.

Credit card applications often mention both your credit history and your income, but these two things are separate from one another. Banks and other lenders will use both your credit history and your income to assess any applications that you make, however, and could place emphasis on either or both when deciding whether or not to approve an application.

10. Having a good payment history for property rental will help your credit card application.

While showing that you can pay rent on time is a good sign that you can manage a major financial responsibility, it doesn’t have much impact on credit card applications. Rental history generally isn’t included on your credit file, so unless the bank asks for extra documentation when you apply, this won’t matter at all.

But don’t worry if you don’t have any credit history – factors such as your age, location, income and employment status also help you get approval on a credit card application. If you have never had a credit card before, applying for a basic card – such as the ANZ First or Westpac Low Fee – and/or requesting a low credit limit can also help your chances of getting an application approved.

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11. Credit card rewards give you more value for money.

Reward credit cards are incredibly popular in Australia, with almost every issuer offering both partner and private reward programs. These credit card reward accounts typically offer points for every $1 spent on the card, which can then be redeemed for everything from gift cards to cash, homewares and airfares.

While some people see reward cards as a way to get added benefits for using their account, it’s important to realise that these types of cards could have higher annual fees and interest rates than other options – so if you don’t use credit a lot or carry a balance, the benefits might not actually be worth it.

12. Credit card rewards are a rip off.

On the flip side, credit card reward programs have copped a lot of flack over the years for yielding a low dollar value compared to average card costs. A special report from the Reserve Bank of Australia in 2012, for example, found that it cost an average of $18,400 to get a $100 gift card through a credit card rewards program, while average card fees ranged from $62 for a basic card to more than $500 for a super premium card.

Many other surveys have showed similar results, leading to an assumption that reward cards aren’t worth it. The truth is that it depends on the card and how it’s used. If you had a no annual fee rewards card, such as the Qantas American Express Discovery or American Express Velocity Escape, and paid the balance in full every month, you could get a lot of extra value out of paying with plastic and end up saving money on things that you want in the process.

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13. Credit card surcharges don’t apply for debit cards.

Credit and debit are different, but that doesn’t mean surcharges apply to one and not the other. A lot of the decisions about surcharges are up to merchants, and many apply them to all cards, particularly when it comes to contactless payments (as some shoppers at ALDI have found out the hard way)

So if you want to avoid dealing with a surcharge, make sure you check out signage in store and fine print online, or ask a staff member about surcharges before you pay so that you can find an alternative that doesn’t cost you more.

14. You can still sign for credit card purchases.

The days of people asking if you’d like to use a “pen or PIN” are gone. Now credit card purchases can only be authorised with a PIN unless they are contactless payments under $100. The only exception, according to the PINwise website, is if the cardholder has “mental or physical impairments” that make it difficult or impossible to use a PIN.

15. Debit cards and credit cards offer the same features when shopping online.

Shopping online with a credit card or debit card is basically the same initial process, but there are differences beyond the type of finance used. Many credit cards, for example, offer purchase protection insurance and fast access to chargeback facilities so that both your money and the things you buy are kept as safe as possible.

If you’re tossing up between using a credit card or a debit card online, it might be worth checking what features you have available through each account and then choosing the best option for whatever you want to buy.

16. Pulling out cash from credit card through ATM

Don’t do it unless in emergency. A cash advances is a transaction initiated by the credit card holder which results in drawing cash from an ATM or cash machine with the use of the credit card. This feature is designed to be a convenience to the cardholder, useful in the event of an emergency in which the customer requires physical cash for a purchase or payment to a merchant. Credit card holders are advised to never use the cash advance option, however, unless it is absolutely necessary, because this type of transaction accrues interest on a daily, not a monthly, basis and at a higher rate than is set for standard purchases. Some cards levy an additional cash advance fee on top of the daily interest.

Whether it’s shopping online, paying down debt or applying for a credit card, these 16 myths have become so common many people assume they are facts. But being aware of the truth behind them means you can make more informed credit decisions and really get the most out of any card you use.

Photo source: Shutterstock
Pauline

Pauline Hatch

Pauline is a personal finance expert at CreditCard.com.au, with 8 years in money, budgeting and property reporting under her belt. Pauline is passionate about seeing Aussies win by making their money – and their credit cards – work smarter, harder and bigger.

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Ask Pauline a Question

Hi, I’m a personal finance expert who loves to help you out! I’ll answer your question within a business day. Pinky swear.

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7 comments (showing the latest 10 Q&As)

Rob Mack

Rob Mack

3 December 2023
1. Is it the merchant or bank that imposes a surchage on purchases? 2. Why is it ilegal in North America, but not Australia to charge a cc fee on purchases?
    Pauline - CreditCard.com.au

    Pauline

    6 December 2023
    Hi Rob! Great questions. Charges are applied by Mastercard and Visa, usually at around 1-1.5% of the transaction (or 0.5 - 1% for debit cards). On top of that, the merchant is charged to process your payment, so those fees are either incorporated into the cost of the products, or added as a separate surcharge on your transaction. Fees are charged all the way down the line, including directly on your own purchases. As for why it's legal here - that's a question for the ACCC! They do set expectations to keep fees in check, but there doesn't seem to be a conversation about removing them. Thanks Rob!
David Green

David Green

26 January 2023
What credit card will be required for a person not employed
    Pauline - CreditCard.com.au

    Pauline

    27 January 2023
    Hi David, one of the requirements of many credit cards is employment to prove that you are able to pay back any debts you accrue.
Amber

Amber

23 August 2022
What credit card can I use to pay off all my debts and only have the credit card to pay
Valerie Pritchard

Valerie Pritchard

11 August 2022
Some companies won’t accept debt cards

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