Credit cards get a lot of bad press in the media. Many have fallen into large debt, especially older generations, and racked up huge bills that take forever to pay off. Despite all this, credit cards are just a product (neither good or bad) and it is up to the customer to use as they see fit. When properly used, credit cards actually save you money, improve your cash flow and come with loads of perks/benefits.
What is a Credit Card?
A credit card is like a temporary loan from your bank. Nearly all banks offer them and they can be associated with few different card interchanges with the most popular being (Visa, MasterCard, American Express and Discovery. You buy something with a credit card and then pay the bank back at a later time. Most credit cards have an interest-free period whereby if you completely repay the amount you have spent (the balance), you don’t get charged any interest. If you elect to pay off the balance over time in smaller amounts then you will be charged interest to compensate the bank for lending you the money. The interest rate is the killer and the reason that debts rise quickly.
Banks make money from credit cards through the customer (you and me) and the merchant (sellers). Customers get charged interest on outstanding balances and annual fees for the credit card. The interest usually ranges from 11% up to 24% which means you would have to repay more than $24 a year for every $100 you ‘borrow’ from the bank. Banks also make money from the shops when you buy stuff using your credit card. A transaction fee is applied to the amount spent (usually a small percentage amount around 0.3%) and this goes to the bank and the card interchange. This is why some shops will charge a surcharge for credit card use.
Waiving annual fees
If you have a home loan or a large amount of money with a bank then you might be eligible to get your credit card annual fees waived. There are also certain ‘free-for-life’ offers which periodically become available. It can’t hurt to ask and a lot of the time if you threaten to cancel your card, the bank’s retention team may give you some bonus or even waive your fees. Usually a simple sentence as follows will do the trick:
Hi. I’ve been given an offer for a no-annual fee credit card with another bank and I’d like to cancel my card unless you can also waive the annual fee
How can Credit Cards save me money?
The key point with credit cards is the interest-free period. This usually lasts from 45-62 days for most credit cards. It means that you have up to 62 days where your own money can be doing something productive like offsetting your home loan or earning interest in your savings account. If you were to spend the same amount in cash or debit card then you immediately part way with the money and therefore miss out on the 62 days of productive money use. I stress that to take advantage of this you actually need to have the amount of money spent on hand to pay off your credit card at the end of the interest-free period. This means that you shouldn’t be spending money you don’t actually have. If you don’t have the discipline to spend within your actual savings then you definitely should NOT get a credit card.
Perks of Credit Cards
We have established that credit cards can save you money when compared to using cash. There are also other benefits to credit cards. One benefit that applies to all credit cards is fraud protection. Because you are using the bank’s money with a credit card, if your card gets stolen, the bank will not hold you liable for any unauthorised charges (as long as you weren’t being negligent and report it to them quickly). In addition, if you have made a purchase and have been deceived by the seller/merchant or charged wrongly, you have the opportunity to ask for a chargeback which is a type of refund. It is usually up to the merchant to prove that they were not in the wrong to prevent your chargeback.
Reward points can be earned with some credit cards and redeemed for gift cards, goods or frequent flyer points. It is really up to your individual circumstances to see if this is worth the value of any potential annual fees. I must state that you will get at least 2% back with the ING Everyday transaction account so you would probably want to beat that to consider rewards points useful.
Higher end cards also come with insurance benefits. Travel insurance is obviously good for those who go on trips and will save a few dollars. It is important to read the documentation because there may be exclusions in these policies which would otherwise be covered in general travel insurance polices.
Purchase protection is for items purchased and lost or broken within a short amount of time (usually under 90 days). The damaged item will often be replaced for free.
Extended warranty can also be useful for items and usually an extra year is added on the manufacturer’s warranty. We should bear in mind that the consumer is automatically entitled to statutory warranties as part of consumer rights.
The perfect credit card criteria:
I personally think the best card for international purchases and use overseas is the Bankwest Plantinum Zero MasterCard. There are no annual fees, no foreign transaction fees, travel and purchase insurance is included and includes a 55 day interest-free period. The only feature it lacks is rewards points. Only the platinum version of the card is eligible for the waiving of foreign transaction fees and applicants will need to have an income of at least $40,000p.a. This credit card is a great option for travelling because you will always get the MasterCard® foreign exchange rate. The only thing to be careful of is potential card skimming overseas but as mentioned beforehand, fraud protection is automatically included.
For those who like to go for at least one domestic flight per year, I think the American Express Platinum Edgecredit card is fantastic. Although there is an annual fee of $195p.a, included is a free domestic return flight on Virgin Australia. In most cases this will cover the cost of the annual fee. In addition to purchase protection and insurances, the point earning rate is really high for supermarkets and fuel (which are necessities that we all spend on). Thus it is very useful for those who convert points to frequent flyer schemes. Acceptance of American Express credit cards is not universal and some merchants do charge a surcharge so that is something to be aware of. As a bonus, if you are a member of certain professional associations such as the Australian Medical Association, Australian Dental Association, Engineers Australia and CPA/CA Australia, then you are eligible to apply for a discounted fee of $149p.a. If you apply through the referral link in the picture below, we will both receive a large rewards points bonus
There are 2 rewards cards which often have free-for-life promotions. They are the Citibank Platinum/Signature Visaand the HSBC Platinum Visa. If you meet their high income requirements (usually at least $45,000p.a.) then you can get a card which satisfies all the ideal criteria except for no foreign transaction fees. They are great for earning rewards points especially for transfer to frequent flyer programs. Both are currently offering this special deal and the cards below will link to the offer page