Thinking of applying for a credit card?
Whether it’s your first credit card or you’re fourth, it’s always important to weigh up your options before you hit ‘apply’. By giving you a credit card, credit card companies are offering you a service: they are providing you with credit that you can spend pretty much as you please. Sounds nice, right? Funnily enough, credit card companies aren’t in this game to be nice. They’re in it to make money.
So, why do we use them? Well, credit cards can be pretty darn handy. They let you buy stuff and then pay it back later, they can allow you to earn rewards as you spend, and they can offer some nifty features. But, if you want to make the most of all that good stuff, you need to know what you’re getting yourself into.
Want to find out more? Course you do. We’re going to look at each type of credit card, so you can see what kind of features they offer – and what to look out for in order to make the most of the card.
Balance Transfer Cards
Credit cards are big business around the world. According to the Australian Bankers Association’s chief executive officer Steven Munchenberg, 450,000 new credit cards were issued in Australia last year alone. It’s really no surprise ASIC’s debt clock is showing Australian credit card debt is currently sitting at $45 billion.
According to analytic software firm FICO, US-based research released shows that 83% of Gen Y (25-34 years old) use credit cards to fund their lifestyle. While that is pretty high, the worrying thing is that 31% said they carried over a balance of US$1000-$4999 (AUD$1300-$6600) each month on their credit card. On top of that, 26% of those aged 18-24, and 17% of those aged 25-34 said they made only the minimum payments each month.
Pretty bad form. Why? Carrying over a large balance each month and only making the minimum repayment can mean paying out heaps in interest, and potentially staying in debt for years. The solution? If you want to pay down credit card debt, a balance transfer card could be for you. Here is the rundown.
What is a balance transfer card?
A balance transfer card allows you to transfer a balance from an existing credit card, which then attracts a much lower rate of interest for an introductory period. Once that introductory period is over, any amount that has not been paid off will start accruing interest at a specified revert rate.
Why would you choose a balance transfer card?
A balance transfer card could be a good option if you have a credit card balance that you want to pay off. Transfer over the existing balance and work on paying it off before the introductory period ends. This can be a great way to save on interest, giving you the space you need to lower your credit card debt.
What should you look out for with balance transfer cards?
Before applying for a balance transfer card, find out if there is a balance transfer fee charged on the transferred balance. This can be up to 3% of the total balance shifted onto the card, which can certainly sting if you’re transferring a larger amount. Also be aware of how much interest you will pay on new purchases, and what the revert rate is. Find out what fees you may have to pay, including the annual fee.
Balance transfer cards can also offer a whole heap of other features, such as no annual fee, rewards, frequent flyer points, and gold and platinum benefits. Think about what you want most out of the card before you apply. If you want to pay down transferred balances while saving money on interest, this should be a priority over other features.
Low Interest Cards
The latest Reserve Bank of Australia data from April this year showed that credit card limits rose to $149.16 billion, up $4.6 billion in the past year. With the average card limit now at almost $9100, that is a lot of temptation to spend. Over in the U.S., FICO figures show that about half of their Gen Y respondents had at least three credit cards, with 19% planning to use their cards to buy big ticket items such as a new car.
Is that such a good idea? While credit cards are made for spending, it’s best to spend only what you know you can pay back. If you absolutely have to have a balance on your card, choose a card with the lowest possible interest. Which is where low interest cards come in.
What is a low interest card?
As you would expect, low interest cards are credit cards that charge a low rate of interest. While some credit cards charge as much as 22% p.a. in interest, low interest cards can offer annual interest rates of around 10% on purchases.
Why would you choose a low interest card?
If you tend to carry a balance on your credit card, a low interest card could be for you. With these cards, you can keep the interest you pay to a minimum, which in turn, helps to keep your balance lower. Some low interest cards offer 0% on purchases for an introductory period. If you’re planning on making a big purchase, this could be a great option – as long as you pay off the balance before the introductory period ends.
What should you look out for with low interest cards?
When it comes to standard low interest cards, you may find them pretty low on features (especially if they have a low annual fee as well). Lower interest means less money for credit card providers. Features are offered as an incentive on cards that providers are likely to make money out of. Think about what’s important for you: saving money on interest, or features you may not use?
As we said, some low interest rates are offered over introductory periods only. If this is what you’re looking for, make sure you know what the revert rate is and how much you are paying in fees. To make the most of the offer, try to pay off all purchases before the intro period ends.
No Annual Fee Cards
Reserve Bank data shows that Australians paid up to $1.51 billion in avoidable credit card fees last year. Avoidable how? These were the kinds of fees that were charged for annual fees, late payment fees and cash advance charges. Prefer to keep those fees in your pocket? When it comes to annual fees, it’s really not that hard. There are currently 29 credit cards on the market that charge no annual fee.
What is a no annual fee card?
Again, this one is pretty self-explanatory. A no annual fee card charges no annual fee. While other credit cards can charge hundreds of dollars per year, no annual fee cards charge zip.
Why would you choose a no annual fee card?
If you want to avoid paying unnecessary fees to use your credit card, a no annual fee card could be just the thing for you. It’s pretty simple really, if you want to save money while still having access to credit, these cards should be the first thing you check out.
What should you look out for with no annual fee cards?
The main thing to be aware of when choosing a no annual fee card is the length of that no annual fee period. Some cards only offer no annual fee for an introductory period, where others have no annual fee for the life of the card. If you choose the first option, be sure to check what the annual fee reverts to after the intro period ends. As with any card, check the purchase rate and any other fees that may apply.
As with low interest cards, you may find that features on no annual fee cards are pretty scarce. While there are certainly no annual fee cards that offer features, they are never going to be as tempting as prestige cards that cost hundreds per year. We said it before and we’ll probably say it again: think about what’s most important to you. If you want to save on annual fees, then pick a no annual fee card. All the other stuff should come in second.
Frequent Flyer Cards
What is a frequent flyer card?
Frequent flyer cards allow cardholders to earn points as they use their card. With a point structure in place, cardholders earn a certain number of points depending on where they use their card. These points can then be converted into rewards, either in the form of tangible items, or in the form of travel-related products, such as flights, hotel stays and VIP airport lounge access.
Why would you choose a frequent flyer card?
A frequent flyer card can be a great option if you use your card a lot. Say, if you use your card to pay bills, buy groceries, and so on. As long as you pay your card off at the end of the month, this is a good way to earn points. If you are a frequent flyer, you can earn heaps of points as you fly, which can go towards more travel in the future.
What should you look out for with frequent flyer cards?
The main thing to think about with frequent flyer cards is whether you will pay off the balance at the end of the month. As these cards can attract higher rates of interest, you may find that the interest you pay on any carried-over balance negates the value of the points you earn. This is also the case with annual fees (and any other fees for that matter). Make sure you earn more back in point’s value than you pay out in fees.
In terms of value for money, choose a card that offers the maximum number of points for the spending you do most – and one that offers rewards that you actually want to use. Lastly, check for other extras on the card, such as VIP Lounge access at the airport, waived credit card surcharges when booking with certain airlines, and free entertainment on flights.
When asked which type of credit card features they looked for, 85% of FICO’s Gen Y survey respondents said they wanted no annual fee, 73% wanted the lowest interest rates, and 75% said they wanted cashback rewards. Here in Australia, rewards cards are just as popular. Here’s why.
What is a rewards card?
Similar to a frequent flyer card, a rewards card allows you to earn rewards points as you use your card. The points you earn can be redeemed in a number of ways, depending on the type of rewards card you have. You could earn cashback, or you could earn points that can be redeemed for certain items within the rewards program.
Why would you choose a rewards card?
Again, rewards cards work best when you use them a lot. If you spend big on your credit card, a rewards card could offer loads back in return – as long as you pay off the balance before it starts accruing interest. If you love earning rewards and getting extra features on your card, then a rewards card may just be for you.
What should you look out for with rewards cards?
This is much the same as a frequent flyer card. Simply make sure that you are earning more in points than you are paying out in interest and fees, and rewards cards can offer a pretty good deal. Also make sure that you are earning the most points for your typical spending pattern, and that you can redeem those points for stuff you really want.
As these cards typically charge more in fees and interest, they tend to offer more in the way of features. Find a card that offers the features and rewards you love, always pay off the balance, and you could be on to a winner.
Gold and Platinum Cards
What are gold and platinum cards?
Also known as prestige cards, gold and platinum cards tend to offer the most in terms of features. These cards come in many shapes and sizes, running from basic to extravagant. Gold and platinum cards may require cardholders to earn a minimum amount per month, and they can come with higher annual fees and interest rates.
Why would you choose a gold or platinum card?
Gold and platinum cards can also be rewards cards and frequent flyer cards. The main difference between the standard version and the gold or platinum version is usually the ability to earn more points as you spend, as well as bonus points on signup. If you are a big spender on your card and want to earn the maximum number of points, a gold or platinum rewards or frequent flyer card could be for you.
Gold and platinum cards also tend to offer more features. These could include VIP airport lounge access, a personal concierge service, complimentary flights and hotel stays, travel insurance, and purchase cover insurance and extended warranty on purchases.
What should you look out for with gold and platinum cards?
As with frequent flyer cards and rewards cards, the key to making gold and platinum cards work for you is balance. Weigh up how much you are paying out in fees and interest, against how much you are getting in return, whether in features or rewards.
As long as you meet the applicant requirements, pay off the balance before it starts accruing interest, and actually make use of the rewards and features, your gold or platinum card could be much more than an empty status symbol.
Back in November 2011, the nation’s cash rate was 4.75%. Now it sits at 1.50%. In November 2011, the interest rate on an average credit card was 17.41% (around four times the cash rate), while now, credit card interest averages 17.28% (nearly 10 times the current cash rate).
What does that mean for you? The credit card market is huge and diverse. Credit card companies really don’t need to offer lower interest rates on their cards, even as the cash rate falls. They have plenty of business and plenty of applicants. That means you need to be smart.
Whichever card you choose, just be smart. Don’t pay more than you have to in fees. Pay off the balance before it starts accruing interest – and if you can’t, try switching to a balance transfer card or low interest card to start paying it down. Make sure the card you choose actually offers you something you want. Ready to make your credit card work for you? Start comparing.
How do you know what to look for in a credit card?
If you want to find the right card for you, you first have to understand your needs as a cardholder. What you need from your credit card will likely change over time, so even if you have had a number of cards in the past, what you look for in your next card may not be what you looked for in your last.
- Do you want to focus on paying down debt? If you have debt on other credit cards that is currently accumulating interest, your focus may now be to pay it down. By choosing a balance transfer card, you could pay less in interest over the introductory period, helping you to pay down what you owe much faster. As clearing your debt is your focus, choosing a low cost card with a great balance transfer would be your best bet.
- Do you want to save on fees? Whether you want to pay less in annual fees or other kinds of fees, such as late fees and foreign fees, you can choose from a wide range of cards that help to keep these kinds of costs down. Bear in mind, cards with lower fees tend to have fewer features, which is a trade-off you may need to put up with if you want to save money.
- Do you want to save on interest? There are heaps of low rate credit cards out there that could help you save on interest if you tend to carry a balance. High feature cards tend to charge more in interest. While you think you are getting more from these cards, if you are paying out in interest, those features don’t actually offer much value. A low rate card may be simpler, but it could save you in the long run if you don’t pay off your balance each month.
- Do you want lots of extras? From hotel stays to business class upgrades, from airport lounge access to comprehensive travel cover, these are the kinds of extras you could enjoy on your card. If you know you will get good value from these extras, compare the options on offer. But be sure to keep in mind the higher annual fee you will likely pay to utilise the extras on offer – and always clear your balance when it’s due to avoid paying interest.
- Do you want to earn rewards? Rewards cards can offer all kinds of tantalising goodies. But, you need to be the right kind of cardholder if you want to get value from the rewards you earn. First up, channel as much spending as you can afford through the card, and always clear your balance. Secondly, choose a card that offers more value in rewards than you pay in annual fees. Be sure to compare your options to find the classic, platinum or black rewards card that rewards your spend.
- Do you want to keep it simple? If you get tired just thinking about small print, a basic card could work well for you. While you still need to read the small print before you apply, a no frills card keeps it nice and simple. You get access to credit, with all the payment features and security basics you’d expect, all for a low annual fee.
What fees should you be aware of?
When comparing credit cards, it’s a good idea to look at the fee structure to see how much you will have to pay in fees. How you use the card will affect which fees you end up paying, but understanding those fees before you apply should help you to avoid them whenever possible.
- Annual fees: This is the fee your card provider charges you each year for providing you with access to credit and the various features on your card. You will usually find basic cards offer lower annual fees, while rewards cards and cards with lots of features have higher annual fees.
- Additional cardholder fees: This is the fee you will pay each year to have an extra cardholder on your account. Some cards allow for a number of additional cardholders at no extra cost, while others charge a small annual fee for each card supplied.
- Late fees: Also known as a late payment fee, this is the fee you will pay if you make your monthly payment after the due date. By setting a reminder or setting up an automatic payment to pay your credit card bill, you can avoid this fee, while also avoiding black marks on your credit file.
- Over limit fees: If your card spending goes over your credit limit, your card provider may charge you an over limit fee. You can avoid this fee by keeping track of your spending via online banking or your credit card app.
- Direct debit dishonour fee: If you pay your credit card by direct debit, and that payment is dishonoured, you may have to pay a dishonour fee on your credit card.
- Cash advances fees: This is the fee you will pay if you withdraw money using your credit card. You will also likely pay a higher rate of interest on the amount you withdraw, which will start accruing from the day you make the withdrawal.
- Foreign fees: When you use your credit card to make a transaction in a foreign currency, your card may charge you a foreign currency conversion fee. This is usually a percentage of the amount, typically at a rate of 2-4%. However, there are cards that charge no foreign fees, which can work well for cardholders who travel overseas or shop online at international retailers regularly.
- Replacement credit card fee: If you need to replace your card, you may have to pay a fee to do so. Replacing your card when you are overseas usually comes with a much higher fee.