About credit cards

Credit cards provide a line of credit from a financial institution. They enable you to make purchases and pay bills without cash, over the counter, over the phone, or over the internet. They can also be used to obtain cash advances via ATMs or EFTPOS. A credit card has a limit to the amount of money that you can spend on it. This is known as a ‘credit limit’.

Advantages

Credit cards are a part of modern daily life, and used wisely, offer many advantages in addition to those above. They enable you to:

• avoid carrying large sums of cash

• purchase essential goods or services immediately without having to save for them

• keep track of your spending

• have access to extra cash for financial emergencies

• have access to special services which many cards offer, such as reward programs, travel insurance, replacement of lost or stolen merchandise, extension of warranty or guarantee, etc.

Because of their general acceptance, and in most cases world-wide acceptance, credit cards can also be extremely useful when travelling.

Disadvantages

With the exception of some premium credit cards, most credit cards charge a yearly fee. In addition, most credit cards charge high interest on the debt. If you can’t pay off the debt immediately, or at least quickly, the interest payments can become a financial burden.                              

If you can’t meet even the minimum monthly repayments, it will affect your credit record, and your ability to borrow. Credit cards aren’t free cash! They must be used carefully and responsibly. Before you charge it – THINK. Because ultimately, you still need to be able to afford it.

How to use credit cards wisely

1. The best way to use a credit card is to use it only when you can pay off the balance at the end of the month, or before the expiry of any ‘interest free period’ the card may offer on purchases. (Note: Interest-free periods don’t apply to cash advances.)

2. Choose a low credit limit to begin with.

3. Look for a card with a low annual interest rate. (Note: Low ‘introductory rate’ offers don’t mean that the interest rate will always remain at that low rate.)

4. Evaluate additional benefits such as reward schemes in terms of their value to you, and any extra costs they may incur.

5. Keep copies of all of your credit card receipts to compare to your monthly statements. Follow up on any errors. Shred receipts that have your account number before throwing them away.

6. Keep a record of the account number, the issuer's name, and the phone number to call if your card is lost or stolen. Learn more about credit card fraud.

Lay-by

If you want an item but can’t immediately afford it, a cost-effective alternative to buying it with a credit card is lay-by. With lay-by purchase you make regular payments towards the full cost of the item, but the retailer keeps it until it is paid off. Lay-bys generally have no credit charges, but there can be an administration fee. Not all retailers offer lay-by, but it helps to ask.