A credit card is safer than carrying cash, and it comes with affordable fees and a long interest-free period, as well as many added benefits and rewards programs.
That is why it is prudent to avoid this option when managing your finances. However, sometimes you need to spend more money than you have available. In this case, you can use a credit product. You just have to ensure that you will spend the money in a disciplined way and stick to a clear repayment plan that you have devised in advance.
Find out how to borrow effectively and responsibly with credit cards, which are quick and convenient to use.
Borrowing options overview
The credit products available at present fall in two categories based on the repayment term. Take a closer look at these categories to decide which one to opt for in the different instances when you need cash.
Short- and mid- term facilities
These credit products typically have a term from 16 days to 5 years. Virtually all types of unsecured loans and credit lines belong to this category. The list includes personal loans, rent to buy deals and consumer leases and credit cards and store cards. Some secured loans like car loans fall into this category as well.
Long term facilities
The main types of long term loans are home loans, home equity loans and debt consolidation loans. The main reason for the longer term is the larger amount of money which you can borrow. The other reason is that these loans are secured with an asset, which is typically the house of the borrower.
The range of long term loans available to consumers in Australia is growing, but they should be approached carefully due to the risk of asset loss which the borrower faces.
How credit cards work
Credit cards are unsecured credit facilities with a short repayment term. You do not have to use an asset as security in order to get finance. You pay back what you owe from your income. With a credit card, you can borrow money up to a set maximum limit during a certain period. During the next period, you will have the opportunity to pay back what you have borrowed without incurring interest charges. You are not required to pay back the total amount which you owe, however. Only a minimum payment is required.
After the interest-free period ends, the lender will charge interest on the outstanding amount.
Since credit-cards are short term borrowing facilities, they should be used primarily for their main purpose - to satisfy short-term cash needs. You should try to borrow only small amounts of money whenever this is necessary even if you have a high maximum limit. It is fine to finance the purchase of big-ticket items such as flat-screen TV or new bedroom furniture set with a credit card.
The important thing is to plan the repayment in advance and to fit it perfectly into your budget.
How to get a credit card
The most effective way for finding the perfect credit card is to shop around and compare the offers of as many Australian lenders as possible. Ideally, the card should have low interest rate, affordable fees and a long interest-free period. Since these credit products tend to have some of the highest interest rates, you should take all measures to give your credit score a boost before making an application.
This will give you the best chances of getting a lower rate.
You must read the terms and conditions of the credit card agreement extremely carefully before signing it to avoid unpleasant surprises while using the facility.
Store cards are easily accessible and this makes them quite attractive. However, they typically have higher interest rates and sometimes higher fees compared to credit cards offered by lenders. You should get a card only after confirming that it has reasonable interest rate which is affordable to you. The longer its interest-free period is the better. Evaluate the reward program, if any, to ensure that you will really benefit from it.
Generally, comparison shopping is a useful strategy when it comes to selecting a store card as well.
How to use your credit card
Don't use credit cards for repaying debt that you struggle with.
As they have some of the highest interest rates around, you will actually increase the size of your debt considerably and this will make things even more difficult for you. If you have any debt issues, you should turn to a debt counsellor right away.
It is fine to have several credit cards, as long as the cost of keeping them is not too high. However, it is best if you use regularly only one or two of them. That way, you will lower the risk of getting into debt due to excessive spending.
Pick the card or cards which have the lowest interest rate and the longest interest-free term. You can set the other ones aside to use only when the need arises.
Don't make luxury item purchases with your credit cards.
The amount which you borrow may turn out to be too high to repay with your income, especially given the high interest rate. When you want to buy a more expensive luxury item, you may want to use a store card with a longer interest-free period or a rent to buy deal with lower interest rate to repay the debt comfortably.
You should resist the temptation to spend more if your bank raises the limit on your credit card as a bonus. The limit may be higher, but your income and your ability to pay are still the same. You must check if the limit raise comes with any additional terms and conditions or charges.
If you are not happy with the bonus deal, you should refuse it.
The transfer of your salary to your credit card account may seem convenient, but it is typically associated with additional transaction fees and charges which give you a smaller disposable income at the end of the day. Besides, you can easily slip into spending more than you earn.
The best strategy to adopt is to have your salary transferred to an account which brings interest in addition to being easily accessible.
Credit cards should not be used for debt consolidation purposes, especially if the debt amount is large. There are specially designed consolidation loans which have lower interest rates.
If you are studying or support a student, you should avoid paying higher fixed costs with a credit card. It is best if you use a student loan or a personal loans which has lower interest rate and a longer repayment term.
Finally, you should always choose to pay with cash rather than with a credit card when you can select between the two options.
Interest will never be charged on cash.