Beginners' guide to credit cards: 6 questions to ask before taking the plastic plunge

If you’re considering signing up for your first credit card, there are a few things you should be aware of and consider before signing on the dotted line, to help ensure you’re making the right decision for your personal circumstances. Here are six simple questions credit card beginners may have, answered by expert Andrew Toone from Bank of Queensland.

1. What exactly is a credit card?

A credit card works much in the same way a debit card does, with a key difference being you don’t need to have the funds available in your account, as you are making use of a line of credit. This means you borrow money from the company that issued you the card to pay for any purchases you make on it. The credit can be extended by your local bank, another financial institution, or even a specific store. When you pay with your credit card, the amount is charged and then at the end of each billing period (usually each month), the card issuer will send you an invoice. You will then normally have a set grace period to pay off the balance before interest begins to accrue.

→Related: Visa vs Mastercard: What’s the Difference?

2. What types of credit cards are there?

There are many different credit cards out there, with each designed to suit a certain purpose or person. Due to this, each card will come with different minimum and maximum credit limits. Your credit limit is simply the maximum amount you are able to have owing on your credit card at any one time. Credit limits generally vary from around $1,000 – $10,000 but can be higher depending on the card. The specific credit limit on your card is typically decided by the lender based on information you provide as part of your application.

Some cards are designed to be used in emergencies only, and may have a lower credit limit, lower interest rate, and a relatively low annual fee compared to other credit cards. Others have higher limits, rates and fees, and are designed for more everyday use such as convenience purchases and regular shopping (think groceries and fuel). They may also be used for larger purchases to allow the item to be paid off over an extended period of time, with the associated interest applied. However, you would need to consider whether a credit card is a suitable way of covering larger costs, as the interest you would pay could make it an expensive way of funding a purchase, compared to, say, using your savings.

Other cards again offer more ‘perks’, such as rewards points or frequent flyer air miles that accumulate as you use your card for qualifying purchases, and can later be redeemed back, although these cards also tend to come with relatively high rates and fees.

3. How much will a credit card cost in rates and fees?

The main thing to remember when using credit cards is that unless you are very careful about your spending, they come with a cost. There are things like the interest charged on unpaid balances each month, and annual fees to consider. Annual fees are fees that a number of card providers charge each year just for the convenience of having the card in your wallet, whether you are using it or not. Interest costs can quickly accumulate if you don’t regularly pay off your balance each billing period, or when a low or no-interest introductory rate period ends.

There are also a few other fees you should be aware of, including international transaction or exchange fees, cash advance rates/fees, as well as potential late payment fees. When it comes to paying off your credit card, you have two options: pay it in full, or making the minimum repayment each month. By paying your credit card balance off in full, you’ll essentially wipe the slate clean, meaning you owe nothing and will have no interest accruing. On the other hand, if you make only the minimum monthly repayments, you will avoid late payment fees, however, you will still accrue and pay interest on the remaining amount owing.

4. What are some of the benefits of using a credit card?

Depending on the credit card you choose, you may have access to a range of beneficial perks as well. When used appropriately, these perks can add up to a financial benefit that can offset or in some cases even exceed the cost of having the card.

Rewards points: Often you can sign up to a rewards credit card during special promotions that see you earn additional points for purchases, or a lump sum of bonus points when you first take out the card. The easiest way to accumulate rewards points on an ongoing basis is to use your card for things you buy every day, and pay off balances before interest can be added. Depending on the card you choose, you may be able to exchange your points for gift cards or other items.

Insurance options: Many cards come with built-in insurance policies, with two of the most common types of cover offered being travel, which can help provide financial protection for things such as your luggage going missing, or your trip being cancelled, as well as purchase protection insurance, which can help protect you if your purchase is lost, stolen, damaged, or goes on sale after you have purchased it. However, as with any insurance policy, it is important to read the product disclosure statement (PDS) carefully, to work out whether the cover you receive meets your needs. For example, just because your credit card offers you some cover for travel related expenses, it doesn’t necessarily mean you would be covered for all the risks that could crop up on an overseas trip and you might still want to consider a separate travel insurance policy for your trip.

Credit against your balance: Some cards will allow you to use your rewards points to essentially get money credited back to you on eligible purchases you have made using your credit card. This can help you to offset the cost of purchases if you don’t use rewards points for other purposes.

→ Related: 8 hacks that could help you pack away more frequent flyer points

5. How do you use a credit card responsibly?

Having a credit card can seem exciting, but remember that it represents a line of credit, not free money. Here are some tips to consider to help ensure you use your credit card responsibly.

• Firstly, before applying, it’s important to consider whether a credit card is the right choice for you and your current and future financial circumstances. One key thing to remember is that it can impact your credit score. Every time you submit an application for a credit card, it will show on your credit rating, regardless of whether you were approved or not. If you ever fail to meet a repayment, or get into financial distress with your credit card, this may also negatively impact on your credit score.
• Keep any spending on your credit card in line with your actual budget, so you can pay off your balance easily at the end of each month.
• If you need use your card for an emergency, pay off the balance as quickly as possible to reduce interest accumulation.
• Set a sensible limit; if you feel you might spend too much, discuss lowering your credit limit with the card issuer.
• Be careful with cash advances (using your credit card to withdraw cash – from an ATM, for example), as they are often subject to a higher rate of interest and aren’t included on no-interest rate grace periods.

6. Do you really need a credit card?

Before you sign up for a credit card, think about whether or not you really need one. If you only want one for convenience or think you’d struggle to pay off your spending in full each month, you might find that the cost of having a credit card outweighs the benefits. However, if you need a credit card for emergencies, or feel that you can leverage rewards programmes to your advantage, a credit card could be a good idea for you.

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About Andrew Toone

Andrew Toone is general manager of product at Bank of Queensland (BOQ). He has more than 25 years’ experience in banking and insurance, and has held senior leadership roles across actuarial, insurance, wealth, banking, finance, product and pricing functions. Before joining BOQ in 2015, Andrew spent 11 years with the NAB Group, where he held senior roles in wealth, corporate and consumer banking. Prior to this, he worked for AXA in the UK, Australia and Asia.

Main image source: GaudiLab (Shutterstock)