Should you get a credit card? We weigh up some of the pros and cons

How does a credit card work?

A credit card allows you to borrow money from a bank to make purchases, generally up to a set limit. Credit cards typically have a minimum repayment amount that you must meet each billing period. You’ll be charged interest on any balance that is still owing on the card, which you will eventually need to repay alongside the balance.

Some credit cards come with rewards programs, with rewards ranging from points that can be spent in stores through to frequent flyer miles and other related perks. If you manage a credit card responsibly, then these perks can be a welcome bonus, but if not, your finances and your credit score could be adversely affected.

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If you’re not sure if you should get a credit card, here are some of the advantages and disadvantages:

What are the potential advantages of a credit card?

1. You can take advantage of credit card interest-free days

Most credit cards offer an interest-free period on purchases, usually up to 44 or 55 days. This is the maximum number of days you won’t be charged interest on your purchases each billing cycle. This interest-free period applies so long as you pay your closing balance in full by the due date each month.

If you don’t pay off your closing balance in full or simply make the minimum repayment, you’ll lose your interest-free period and be charged interest on your unpaid balance. Also, the interest-free period typically only applies to purchases, and not to other types of transactions, such as cash advances.

2. A credit card may help in an emergency

Credit cards can sometimes be useful in an emergency situation if you need to pay for something but you’re short on cash. Remember though, you can be charged interest if you don’t pay your credit card balance in full on time.

If you only intend to use your credit card for emergencies, a card with no annual fee could potentially help to minimise your costs.

Another option could be to create an emergency fund to help cover any unexpected expenses that crop up. You might also like to try the Canstar app to access money-saving tips and compare alternatives, or the Budget Planner Calculator to help you manage your personal budget. This could help you avoid situations down the track where you need to rely on a credit card for emergency funds.

3. You can earn credit card rewards and points

Some credit cards allow you to earn rewards such as frequent flyer points, rewards points or cashback on eligible purchases. For example, with a frequent flyer credit card, you typically earn airline points for each dollar you spend using the card.

Rewards credit cards usually have higher interest rates and annual fees than non-rewards cards.

If you think you may struggle to pay off your balance in full each month, you may find that an interest-free or low rate credit card, or sticking to a debit card, may help keep your costs down. Any benefits you gain from a rewards card could likely be outweighed by the interest and fees you would be charged on the outstanding balance.

4. You may be protected by credit card insurance

Some credit cards (usually the premium options) provide some complimentary insurance policies. For example, some credit cards come with complimentary travel insurance and rental vehicle excess insurance included.

Other common insurance offerings can include:

Purchase protection insurance

1. , which can cover you against loss, theft or accidental damage to personal items purchased with your card;

Price protection insurance, which may refund you the price difference if an item you bought using your card has dropped in price, and;

Extended warranty insurance, which can extend the manufacturer’s warranty on eligible purchased products by a certain amount of time, such as 12 months.

You may also come across optional consumer credit insurance (CCI). This type of insurance provides cover if you are unable to meet your repayments because you are unemployed, you are sick or injured, or you die. The Australian Government’s Moneysmart warns that CCI insurance offers “poor value for money” and stresses “you don’t have to buy it”.

As with any insurance product, take the time to understand the limits and exclusions of any cover you may get and consider your personal needs and requirements.

What are the disadvantages of credit cards?

1. You may be charged interest on your credit card

If you don’t pay your closing balance in full by the due date, you will generally lose your interest-free period. This means you’ll pay interest on your outstanding purchase balance.

You may also pay interest on any cash advances or balance transfers. Cash advances typically attract interest from the date of the cash advance until it’s paid off.

For balance transfers, some cards have 0% balance transfer offers, where you are charged no interest on your transferred balance for a limited time. But at the end of the offer period, the balance transfer rate will revert to the new rate, which could be higher than the interest rate charged on your existing credit card. If you haven’t paid off the amount transferred, you will be charged this rate on your outstanding balance.

2. You’ll likely face fees and costs

You can be charged a range of credit card fees and other related costs. This could include annual fees, late payment fees, international transaction fees, cash advance fees and balance transfer fees.

There are some cards that have no annual fees, but these are usually ‘no-frills’ cards. Frequent flyer and rewards credit cards typically charge higher annual fees.

3. Your credit score could be affected, if you’re not careful

If you miss your credit card repayments, this can be recorded on your credit report and can make a negative impact on your credit score. You’re considered to have missed a payment if you make the payment more than 14 days after the due date. This will stay on your report for two years.

Making multiple applications for credit in a short space of time can also be bad for your credit score. This flags you as a greater risk compared to someone who makes infrequent applications.

On the flipside, if you use your credit card responsibly and make your repayments on time each month, this can help build up your credit history and improve your credit score, thanks to Comprehensive Credit Reporting (CCR).

Are credit cards worth it?

A credit card can be a useful tool for daily spending, and can earn you various perks, as long as you can manage it responsibly and pay your balance off each billing period to avoid interest charges. The value a credit card offers may depend on how you use the card’s features and benefits, as well as the costs involved.

For example, a rewards credit card may be ‘worth it’ for you if the benefits you get from using it outweigh the fees and charges, and you are able to manage your repayments. On the other hand, a credit card may not be ‘worth it’ to you if the money you’ll end up paying in fees and interest will outweigh the benefits.

If you tend to carry a balance on your credit card from month to month, only making the minimum payment required, then the interest you could end up paying on a premium rewards credit card could be significant.

In this instance, a low rate credit card without perks and rewards may be suitable for your needs.

If you feel you may not be able to manage a credit card responsibly, such as if you think you’d be tempted to overspend and end up with a large balance owing and limited capacity to repay it, then you may decide that a credit card isn’t worth it for you right now

How can I decide on the right credit card?

If you’ve decided the advantages of a credit card outweigh the disadvantages, the next step is to work out the type of card that might suit your situation. In making your decision, you could consider:

Your repayment habits

Will you pay off your balance in full by the due date? Or are you likely to only make the minimum repayment? If so, you may find a no-frills card with a low interest rate and low fees useful, or decide to avoid a credit card completely.

Interest rates

If you are unlikely to pay off your credit card in full each month, you could look for a card with a low purchase rate. If you plan to do cash advances or a balance transfer, also check their interest rates. Some credit cards also offer 0% purchase rate offers for a limited time, but be sure to check the revert rate. There are also some interest-free credit cards that offer a 0% interest rate, but other fees and charges can apply.

Annual fees

Annual fees are typically higher for rewards and premium credit cards compared to other types of cards. If you are interested in a rewards card, consider whether the potential rewards will work out to be greater than the fees.

If you’re considering a credit card, you may find it helpful to read any relevant documents, such as the Target Market Determination (TMD) and Key Facts Sheet.

You can also compare your options with Canstar. Canstar compares credit cards based on factors such as fees, interest rates, features and reward programs to determine which credit cards may be eligible for a 5-Star Rating.

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