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

Credit cards can be useful and some come with perks, such as access to rewards programs and complimentary insurance policies. But credit cards can also be expensive if you choose the wrong one and if you don’t make your repayments on time. We take a look at the potential pros and cons.

If you’re thinking about getting a credit card, or any other type of credit, it’s important to weigh the potential advantages against the risks.

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. It 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.

The interest-free period also only applies to purchases. It doesn’t apply to other types of transactions, such as cash advances.

2. A credit card may help in an emergency

Credit cards can also 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 balance in full on time.

If you only intend to use your credit card for emergencies, you may want to look for a card with no annual fee.

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 or 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 be better off with an interest-free or low rate credit card, or sticking to a debit card. Any benefits you gain from a rewards card could likely be outweighed by the interest and fees you would be charged.

4. Weigh up credit card insurance

Some credit cards (usually more premium ones) provide some complimentary insurance. For example, some credit cards come with complimentary travel insurance and rental vehicle excess insurance.

Other common insurance offerings include purchase protection insurance, 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.

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 and that could be higher than your existing credit card. If you haven’t paid off the amount transferred, you will be charged this rate on your outstanding balance.

2. Credit card 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 impacted, if you’re not careful

If you miss your credit card repayments, this can be recorded on your credit report and can have 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.

→ You can check your credit score for free

How can I decide on the right credit card?

If you’ve decided the advantages of a credit card outweigh the disadvantages, the next thing to work out is 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 be better suited to a no-frills card with a low interest rate and low fees, or avoiding a credit card completely.
• Interest rates: Check the card’s purchase rate. If you are unlikely to pay off your credit card in full each month, you may want to look for a card with a low purchase rate. If you plan to do cash advances or a balance transfer, also check these 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. See which credit cards Canstar has given a 5-Star Rating.

Cover image source: Ivan Kruk/Shutterstock.com