Credit cards & loans

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Credit cards:

  • Are a form of short-term finance
  • Are a convenient way to pay for things, reducing the amount of cash we have to carry around, including when we travel
  • Provide an easy method for making purchases by phone and over the internet
  • May have attractive rewards programs associated with them (e.g. Frequent Flyer points)
  • Can be a useful source of emergency funds
  • Need to be managed carefully so that we don't spend more than we can afford

Credit and loans are essentially the same thing. We just tend to think of credit cards as separate from car loans, personal loans and housing loans because we use them differently.

Buying on credit

You should always be aware of how much you're paying for the privilege of buying now and paying later. Interest rates on credit cards are usually much higher than other types of loans.

Before purchasing on credit, ask if it's something you really need or if it's just something you really want. Can you afford to pay it off sooner rather than later?

Control your credit cards, don't let them control you!

Here are some important tips to help you control your credit cards:

  • Cash advances - beware!
    Even if you have an 'interest-free days' card, you pay interest immediately for cash advances. Any payments you make will not repay the cash advance until all previous credit advances have been repaid in full. You will also lose the benefit of the interest free period until you clear your account of the cash advance.
  • Keep fees down
    Manage your card carefully. Try to avoid unwanted fees for exceeding your credit limit, failing to pay the minimum monthly payment on time, having a rewards program you don't need, or allowing your payments to be dishonoured.
  • Low or no fee payment methods
    Find the cheapest and easiest way to pay off your card. Phone and internet banking are almost always cheaper than paying over the counter. It may be convenient to have monthly payments deducted automatically from your account, but this is unsuitable if you want to pay off the balance owed each month.
  • Leave it at home
    If you're going out or shopping and think you might be tempted to buy something on credit, leave your cards at home.
  • Keep it safe!
    Don't let someone else get their hands on your credit card details. See this advice about banking and credit card scams (new window) and Identity fraud (new window).

Managing your credit cards

More than one card?

Most people only need one card. The more you have, the more fees and charges you have to pay. If you're experiencing financial hardship, having more than one card may tempt you to use cash advances from one card to pay off another, or increase your debt further causing further financial problems.

Paying off your balance

The best policy is to pay your balance in full each month or before the end of your interest-free period. By doing this, you avoid paying interest charges on your purchases.

If you can't manage this, clear your debt within a couple of months. If you find yourself borrowing up to your limit every time you make a payment, consider cancelling your card, and taking out a personal loan at a lower interest rate to pay off the debt. This is called 'debt consolidation'. See the 'Managing debt' page for more information.

Talk to a financial counsellor (new window) if you're having financial trouble. A financial counsellor can offer the best advice for your unique situation and help you create a realistic budget you can stick to. See our 'Budgeting' page in this section for more detail.

Links

Australian Competition and Consumer Commission (ACCC) - Debt
ACCC's Debt pages provide information on understanding and managing debt.

MoneySmart - Credit Cards
Information about credit cards, avoiding credit card debt and keeping your card safe from fraud.