Credit Cards Savings Guide

From how to pick the right card to common mistakes to avoid, here's what you need to know to save on Credit Cards.

Guide Contents

    The Credit Card Basics you need to know

    When used wisely, a credit card is an intelligent tool within your personal finance toolkit.

    Credit cards offer a convenient way to pay for everyday purchases, both in-store and online. It enables you to spend money you don’t have, interest-free, while the money you do have is earning you interest and working hard for you.

    But credit cards do require a high level of discipline. The goal is to always repay your credit card in full, at the end of each month, to avoid paying interest and accruing fees and interest charges.

    Here are the basics that every credit card user should know:

    Selecting your credit card limit

    Your credit card will come with a maximum spend limit. This is the amount of money you have been approved to spend and is known as your credit limit.

    Top tip

    ‘More’ is not always ‘better’ when it comes to credit card limits.

    The key to selecting a credit card limit is to do so based on your budgeting and what you can afford. You need to be comfortable that the limit you have chosen is within your means and you are capable of repaying it in full each month.

    When you apply for a credit card, the bank or financial institution will often suggest a credit limit to you.

    Stop

    This limit will often be higher than what you had in mind, so consider declining the higher limit and selecting a lower limit that works with your budget.

    The difference between credit cards and debit cards

    Debit and credit cards are very similar. They are both convenient ways to access money.

    Both often use Mastercard or VISA as their payment scheme. This means you will get the same level of convenient access to your money, wherever you are in the world, with either a debit or credit card.

    Type of card How they differ
    Debit cards Normally associated with your everyday account and thus have very little fees (some banks charge a monthly account keeping fee, though this is increasingly rare these days and something you can negotiate).
    Credit cards Standalone lines of credit. You can opt to have a credit card with your primary bank or with any other financial institution; the choice is yours and you don’t need to have an everyday account with the same provider.

    Credit card statements and how they work

    Each month, you will receive a credit card statement; either in the mail or via email.

    Your credit card statement will outline your total spending, transaction by transaction, for that statement period. This gives you a chance to check your transactions for fraudulent activity and more importantly – assess where you spend the majority of your money for budgeting purposes.

    You will also get a quick summary of any fees, charges or interest you have accrued.

    Top tip

    It’s very important you pay your ‘closing balance’ in full before the due date.

    This will ensure you do not pay interest. If you cannot pay the full closing balance, you will be required to pay a ‘minimum repayment’ which varies amongst credit cards, however is normally around 3%.

    The Australian Government now requires that all statements outline a ‘minimum repayment warning’ which explains the consequences for you financially if you only repay the 2-3% minimum. For example, it will tell you the estimated minimum repayment and then go on to showcase how many years it will take you to repay the debt using that method. Often, it’s quite alarming and will state ’64 years, 2 months’ – a real eye-opener on the need to pay more than the minimum each month.

    Discipline is key and your statements should be used as a way to keep yourself honest. If you don’t trust yourself to review your statement and make payments on time, consider setting up automatic repayments.

    How additional cardholders work

    An additional cardholder is someone you nominate to have access to your credit card, with their own personalised credit card. It’s important to note that an additional cardholder has access to the funds, though does not have an obligation to repay the debt. You are liable for all repayments and the debt created by the additional cardholder.

    Additional cardholders can be useful for family members, particularly loved ones that need a credit card in case of emergencies but may not be wanting to get their own credit card.

    If you are wanting to have a credit card with your spouse or partner; you will need to apply for a ‘joint-account credit card’ whereby the liability of the debt is split between both people.

    The one thing you must remember about credit cards

    Credit cards are an incredibly powerful tool. When used correctly, they can greatly help you manage your cash flow, live interest free and earn rewards while doing so. When credit cards are abused, they can significantly hurt your finances.

    What’s the catch? To enjoy these interest free days on purchases, most cards require you to repay your balance in full at the end of the month (and not be carrying a balance). This means that “55 days interest-free” is only useful to you if you intend to repay your debts in full.

    Try and avoid becoming a statistic; manage your credit card, reduce your spending and maintain discipline in repaying the balance.

    Fact

    The average Australian is said to owe $4,200 in credit card debt; that’s $700+ in interest per year at a rate of 15-20% p.a. (source: ASIC’s MoneySmart, 2017).

    How to select the right credit card for your needs

    There are hundreds of options for credit cards out there — whether you spend a lot, are looking for rewards points, have the capacity to pay it off each month, or are looking to consolidate your debts onto one card.

    Interest rates, annual fees and balance transfer periods can all factor into the choices you make.


    1. Low rate credit cards

    GOOD FOR:  People who are unable to repay their credit card debt in full at the end of each month – as the interest charged will be minimal compared to that of a more premium credit card.
    PROS: Simplicity and low interest rates; they often have an annual fee of $100 or less.
    Interest rates can vary but a good rule of thumb is to search for a low rate card with an interest rate of ~13%. Many financial institutions are launching low rate credit cards with rates of 10% or less, which is nearly half that of the average credit card in the market (20%).
    CONS: Will not offer complimentary perks and benefits such as bonus frequent flyer points, free insurance and access to airport lounges; however, they will give you access to low interest rates, reduced fees, smaller credit limits, up to 55 days interest free on purchases and sometimes balance transfer specials (giving you 6-24 months of 0% interest to consolidate your other debts).

    Top tip

    You can search the low-rate credit cards currently on the market at comparison sites such as creditcardcompare.com.au* and ratecity.com.au*


    2. Reward point credit cards

    Reward point credit cards offer a good way to be rewarded for your spending; whether it be via the credit cards own reward programme, cash back or frequent flyer points from your airline of choice (Qantas, Virgin or similar).

    You can use sites like ‘Point Hacks’ to source introductory bonus offers, often giving you up to 100,000 bonus points for simply signing up. Sites like ‘I Fly Flat’ can teach you how to exploit these point schemes and quickly gather enough points to fly ‘flat’ aka Business Class for free.

    A general rule of thumb when dealing with Australia’s most popular point scheme (Qantas Frequent Flyer) is that a point is worth in the vicinity of 1-1.5 cents. Using points to upgrade your existing flight bookings is one of the most effective ways to enjoy your points.

    GOOD FOR: People who spend a lot on their credit card.
    PROS: There are numerous ways you can maximise your ‘points earn rate’ by leveraging your credit card for all types of different spending including everyday purchases, bills and payments.
    CONS: Often these credit cards have a higher annual fee and/or a reward programme fee to participate. It’s wise to ensure that your fees don’t outweigh the amount of rewards you will receive, as often these types of credit cards require quite a large amount of spending to earn enough points.

    Top tip

    You can click here to answer a few questions* on RateCity’s credit card matching tool and it will tell you which sort of card might be right for you.


    3. Balance transfer credit cards

    Balance transfer credit cards are not a specific type of credit card as such, they are an introductory offer whereby you pay 0% interest (or thereabouts) on existing credit card balances you transfer for an extended period of time.

    If you are opting for a balance transfer credit card to take advantage of the 0% interest rate for an extended period of time, it pays to do your research in order to find the longest possible balance transfer length (offers range from 6 months to 24+ months).

    GOOD FOR:  People who want to pay no interest on their balance for a period of time.
    PROS: A long balance transfer can be a good strategy to  pay down your debt.
    CONS:  You will sometimes be charged a fee of around 2% of the balance, and making too many balance transfer offers in a short period of time can negatively impact your credit score.

    Top tip

    Once you select your balance transfer credit card, the aim is to repay the debt in full before the 0% interest free period ends.

    The best way to do this is to divide the total amount of debt by the number of interest free months and repay that amount each month.

    E.g. $15,000 at 0% for 12 months = $1,250 per month for 12 months.


    4. Gold and platinum credit cards

    Gold and Platinum credit cards are often designed to give high spenders access to complimentary services and benefits.

    GOOD FOR:  People who spend a lot, travel a lot and can afford the higher fees and interest rates.
    PROS: Common Platinum benefits include complimentary insurance (purchase protection, travel insurance or car hire excess insurance) and in some cases, can be worth their annual fee immediately. E.g. If you hire a car twice a year, the ‘excess’ insurance might be costing you up to $500. A gold or Platinum credit card offering complimentary car hire excess insurance will immediately save you $500 a year.
    CONS: These benefits come with a much higher annual fee and interest rate thus are only useful if you are able to professionally manage your credit card spending and repay the balance in full each month.

    Note that Gold and Platinum credit cards also come with higher minimum credit limits; this means you will need to accept a credit limit that is often $15,000 or more. This requires strong self-discipline to not over-spend and to ensure you repay your card in full each month (or else wear the consequences of an interest rate that is around 19% or more).

    You can search the rewards card offers currently on the market at comparison sites such as creditcardcompare.com.au* and ratecity.com.au*

    5 credit card features the banks don’t want you to understand

    1. Balance transfer offers can hurt you even more

    When you transfer your existing credit card debt to a new credit card, it’s called a balance transfer. Many credit card providers offer balance transfer incentives to grab your attention; such as 0% interest on your transferred balances (up to 24 months).

    If you are paying high interest on multiple credit cards, consolidating the debts is not only cathartic – but the savvy thing to do. It will enable you to use the balance transfer period to focus on repaying your debt in full.

    What’s the catch? Most people don’t repay their balance in full within the allocated balance transfer period. In fact, they go on to spend more and accumulate even more debt. Banks rely on this to obtain new customers with good intentions, who go on to be long term customers that regularly get charged interest and annual fees.

    Want to outsmart the banks? Consolidate your debts with a balance transfer credit card (ideally for 24 months) and divide your total balance by the number of months your balance transfer offer is for (in this case, 24). Pay that amount every month without fail. If you can control your spending in that time (e.g. not use the card at all) – you are guaranteed to repay your debts and pay 0% interest while doing so.

    Top tip

    You should immediately close down your old credit cards upon transferring the balance to your new card.

    A common mistake people make is leaving those cards open, only to accumulate even more debt. If you are unable to trust yourself, consider cutting your new card up so you cannot spend – or even giving it to a family member to hold on your behalf.

    2. Minimum repayment amounts are not wise

    You should always aim to repay your monthly balance in full. If you can’t – you will be charged interest. Minimum repayment amounts are set by your bank, often 2-3% of the closing balance on your statements.

    To be blunt, paying the minimum amount is a bad idea. Not only will you be charged interest, but that interest will in turn be charged its own interest – compounding the problem and you could end up repaying many times more than you borrowed.

    3.Cash advances from your credit card are not a smart idea

    Credit cards are not to be used to withdraw cash; you have your debit card for that.

    Withdrawing cash from your credit card often comes at a much higher interest rate and an upfront charge; this charge can be a % of the amount you withdrew or even a flat fee. Cash advances are not eligible for interest free days like your purchases are so remember that the moment the money touches your hand from the ATM, you are paying interest for it

    4.Cash advances from your credit card are not a smart idea

    Just about every credit card on the market offers interest-free days on eligible purchases. Often, it’s between 44 and 55 days interest-free.

    What’s the catch? To enjoy these interest free days on purchases, most cards require you to repay your balance in full at the end of the month (and not be carrying a balance). This means that “55 days interest-free” is only useful to you if you intend to repay your debts in full.

    5. Annual fees versus complimentary benefits

    Annual fees are charged upfront, the moment you open your credit card and of course are charged annually for the life of the account. Annual fees are often higher on premium cards, while lower for basic credit cards.

    Annual fees are also a great way for the banks to recover the perks and benefits they offer you. For instance, while they may offer you complimentary insurance or concierge service – it’s actually the annual fee that is paying for it.

    Do your research when looking for a credit card. Apply common sense to figure out if the annual fees and regular charges will be of benefit to you and your spending patterns.

    How interest free periods really work on credit cards

    Many credit cards offer up to 30, 44 or 55 days interest-free on purchases. While this may sound good, it’s actually a little more complex than most customers realise.

    How does it work?

    First of all, to be eligible for interest-free days you need to always repay your outstanding balance in full, by the due date. If you don’t do this; no interest-free days.

    Secondly, the reason they say ‘up to’ when quoting the number of days is due to this little trick. If it’s a purchase on the first day of the billing cycle (the day after you repay your balance in full) – you get the full number of days (say 55 days interest-free). If you make the purchase 7 days after the start of the billing cycle, it will only be 48 days interest-free (55-7).

    The number of days you get interest-free can vary depending on the day of the billing cycle you are on, so a good rule of thumb is to purchase earlier in the month (or billing cycle).

    Fact

    If you pay off your outstanding balance each statement cycle, you will not be charged interest. If you fail to repay the full balance, you not only start paying interest on your balance – you negate the ability to have interest free days on any other purchases that month.

    The top 11 mistakes we make with Credit Cards

    1. Not using balance transfers to save money on interest

    A big mistake that has the ability to cost you thousands of dollars; always consolidate your debts and make use of balance transfer offers to pay 0% interest.

    Unless you are happy with your debt, chances are you are wanting to repay the debt and be done with it. A balance transfer offers the most convenient and smartest way to do just that. Use the 0% interest free period to make lump sum repayments and generate solid inroads into becoming debt free.

    2. Holding multiple credit cards

    This can be a big mistake. While having multiple credit cards may seem convenient for one reason or another, it’s a quick way to get into debt and severely impact your ability to borrow money for important life events (such as your mortgage, more on that below).

    If you have higher spending power, you will eventually use it. It’s the way the world works and it takes a lot of self-control not to – especially at Christmas or similar important events.

    Top tip

    Close the credit cards you don’t use.

    3. Not understanding your credit cards fees

    There are so many fees and charges on credit cards, yet most people wouldn’t have a clue what the financial implication is for doing something wrong.

    Study your credit cards introductory welcome booklet and learn what fees get charged and when. Ranging from late fees to what happens when you use your card online at foreign retailers and pay in currencies other than Australian Dollars; it’s on you to know the implications of your card usage.

    4. Making minimum repayments

    Paying the minimum amount owed is a guaranteed way to have debt the rest of your life. The minimum repayment will technically meet your obligations with the lender, but will cost you a lot of time and interest in doing so.

    Always opt to repay your card in full or at least make lump sum repayments that far outweigh the minimum repayment amount.

    5. Paying your credit card late

    If you pay your card late, you get charged late fees. These fees then add to your balance and accrue interest. Late fees are completely avoidable and simply require mature and concise planning to manage your money.

    Always pay your card on time. If you find yourself unable to do so, setup automatic repayments with your credit card provider so you never have to remember again.

    6. Applying for multiple credit cards all at once

    When you apply for a credit card, it impacts your credit rating. The bank will need to access your credit file and check your history, which in turn leaves an ‘imprint’ on your file that a bank is looking at you.

    If you apply for multiple credit cards at once, it will create multiple imprints. The problem with this is that regardless of whether you end up opening the card and using it, other banks will assume you have and be hesitant to lend to you.

    Multiple applications are also a sign of desperation and in turn could lead lenders to think you may be in financial trouble.

    7. Withdrawing cash from ATMs

    You’ve likely heard it before, but cash advances are a mistake. The cash advance attracts a far higher rate of interest and immediately slaps you with a fee (whether it be a flat fee or percentage of the amount you withdraw).

    If you find yourself in a position of contemplating the withdrawal of cash from your credit card, it’s a tell-tale sign that something may be wrong with your money management and you should begin a plan to rectify your cash flow and spending habits.

    8. Assuming your credit limit is your spending threshold

    Just because you have been given a credit limit of $15,000 – doesn’t mean it’s now your spending threshold. In honesty, you probably couldn’t repay that amount of money for a long time and would in turn be charged an excessive amount of interest.

    Your credit card limit is not your threshold, it’s a far-away mark that you could use if you really had to and an emergency called for it. Consider ringing your bank and reducing your limit to something more sensible; if the limit is low, it’s harder to make a mistake.

    9. Opting for an expensive rewards card when you don’t spend much

    Before paying a couple of hundred dollars to get a platinum, gold or rewards credit card – consider whether you actually spend enough money to truly gain any material benefit.

    Ask yourself whether or not you would be able to repay the balance in full and whether the additional perks and benefits truly add value to your life. While some believe that a platinum credit card makes you a ‘high roller’ remember there is nothing more ‘high roller’ then someone who doesn’t need credit at all.

    10. Not reviewing your credit card statements

    If you’re not looking at your monthly credit card statements it would suggest two key things about you; you don’t want to know what’s on there and that you are likely uncomfortable with the level of spending you do.

    It’s quite common for retailers to accidentally double charge you for things, so it’s vitally important that you regularly check your statements.

    Rectify this by making a point to review your statements when they come in. It also serves as a really good way to analyse your spending and see where you spend the majority of your money. Often it can be quite confronting to realise just how much you spend on small things; coffees, magazines, fast food and more. Your statement can serve as a reminder to tighten the belt next month on a range of spending categories.

    11. Not being aware that credit cards impact your other lending

    Regardless of how much you owe on your credit card(s), lenders will see your credit cards as a liability that will impede their decision to lend you money.

    This means you may not be able to get a loan at all, or will only be approved to borrow a small sum – which likely won’t be enough for purchasing a house.

    If you are intending on buying a house, start acting now – consolidate your cards, close as many as you can and begin paying off your existing debt. You don’t want the daily coffees you put on your credit card impacting your ability to buy the house of your dreams.

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