What are some of the pros and cons of credit cards?
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Having a credit card can be convenient, but it may also be financially risky depending on your situation. High-interest rates, annual fees, spending beyond your means, and credit score impact, are all factors you might want to consider before applying.
To help with your decision, we’ve outlined some of the advantages and disadvantages to using a credit card, along with a range of key credit card features you should look out for.
Pros and cons of a credit card
While there can be lots of benefits to having a credit card, there may also be some potential downsides to be aware of. Depending on your own personal situation, some advantages and disadvantages of a credit card may include:
Credit Card advantages and benefits
- Possibility of up to 55 days interest-free on your purchases and access to a line of credit for emergencies
- Using the card responsibly and paying monthly balance on time may boost your credit rating
- Earn rewards points or cash back from eligible spending, plus other extras such as travel insurance
- It may be safer than using cash and can make it easier for online purchases in many currencies across the globe
- A debit or credit card may be required to make car, hotel, or flight reservations
- Can help to generate a monthly record of your expenses that you can check anytime online
- Security through zero liability protection to help protect against fraud
- A balance transfer credit card may help consolidate your debt and save you interest
- May provide the option to ask for a chargeback.
Credit card disadvantages
- Annual fees can range from $0 to thousands of dollars, depending on your card issuer. Generally, the higher the fee, the more perks you can access.
- Higher interest rates depending on the card you select. Interest rates can be higher than other finance options, such as personal loans. They’re usually calculated daily and might quickly blow out your debt if you don’t make regular repayments.
- Fees on cash advances. A cash advance fee and higher interest rate is often charged when you take out cash using your credit card, or for some other transactions such as gambling or fund transfers. It’s important to review the terms and conditions to understand these additional charges.
- Risks of credit card fraud or identity theft. Although there are protections in place, it can be a long process to get your money back, and in some cases you may not be compensated.
- You may risk getting a bad credit score if you don’t keep up with your card payments. Your lender will notify credit reporting agencies of your defaults and late payments.
- You may have to pay extra fees such as balance transfer fees, ATM withdrawals, charges for some rewards programs, and overseas transactions.
Cash advances
Withdrawing cash from your credit card is a cash advance, which may seem convenient, particularly in emergencies. As soon as you make that withdrawal, though, many credit cards will charge you a higher interest rate daily, plus there’s usually a fee. There may be a limit on how much cash you can withdraw from your card and it might not be permitted in some circumstances.
Improve your credit score
Credit cards may help you build your credit score if you use them responsibly. Lenders will see that you have an active credit history that shows how often you make repayments on the card. These insights are useful if they’re considering your creditworthiness for a personal loan, car loan, or mortgage.
Rewards points
Some credit cards come with their own rewards programs. There are four more common programs in Australia: frequent flyer points, cashback, rewards points, and supermarket cards.
They generally offer a range of perks, which could include:
- Sign up offers like a lump sum of points, miles, or cash back
- Travel insurance
- Frequent flyer points
- Deals for dining, online buying, and even grocery shopping discounts
- Complimentary free Wi-Fi or a night’s stay in some hotels
- Credit back in your account or vouchers / gift cards
Emergency funds
Having a credit card can allow you to quickly access funds in an emergency. However you won’t have an unlimited line of credit and the funds will need to be paid back, usually with interest.
Chargebacks
A chargeback is what happens when the cardholder disputes a transaction they didn’t authorise, and it’s then reversed.
The reason for those disputes can range from:
- The goods or services didn’t arrive
- Fraudulent transactions
- Duplicated transactions, or
- The goods and services don’t match the merchant’s description.
If you don’t know where to start with your complaints to a seller, you can take a look at the Australian Competition & Consumer Commission’s Shopper app. It’s a free tool and guide to your consumer rights.
If you’ve had no luck dealing with the merchant or company that sold you the service or product, your lender may be able to help. Chargebacks don’t apply if you’ve changed your mind or bought the wrong thing by mistake.
Interest rates
Check the terms and conditions of the credit card before applying as they will detail the annual interest rate. If you don’t pay your credit card off in full each month, the interest rate could see your debt increase to a level you can no longer manage.
To get an insight to help you estimate how you’ll manage your card debt with a particular interest rate, you can use MoneySmart’s credit card calculator.
Credit limit
Take time to understand what credit limit suits your financial situation best. If you go beyond it, your transactions may be declined, or incur fees.
Smaller limits, will usually mean you’ll have fewer, if any, opportunities to earn rewards. But this may provide you with a lower interest rate compared to some higher limit cards, for example.
Annual fees
Most credit cards charge an annual fee that you’ll need to pay to use your credit card. The higher the fee, the more likely you’ll have a broader range of perks. However, remember that the fee is an extra cost you have to cover and can add up alongside the card’s interest rate.
How to apply for a credit card
You can apply for a credit card online, over the phone, or in person at a financial institution branch. The card issuer will also check your credit score and eligibility for the card. MoneySmart shows you how to access your credit report and score for free.
You can also read more here about what to consider when applying for a credit card.
What is required when applying for a credit card?
To apply for a credit card you generally must be at least 18 years old, a citizen or permanent resident of Australia, or have an eligible temporary visa.
Lenders usually looks for assurance that you:
- Have regular income
- Consistently pay your bills when they’re due
- Hold a good credit score, and
- Can demonstrate stability in your lifestyle.
Some credit cards also need you to have a minimum income and may need to see an acceptable credit score based on their requirements.
To find a suitable credit card for your circumstances it can help to reflect on its pros and cons and your confidence to use it responsibly. Use our comparison table with a range of lenders and cards, which may help you choose a suitable credit card.
