Written by Katie Douglass
26/03/2021 | 6 minute read
Written by Angelica Silva
26/03/2021 | 11 minute read
Knowing whether credit cards are worth it or not can be tricky. On the one hand, having a credit card handy for any future emergency purchases would be such a benefit, after all, who knows when you’re going to have to get some emergency car repairs done or replace a busted fridge. On the other, you know that having access to a line of credit like a credit card will be a serious temptation to have a few shopping sprees.
So, what do you do? If you’ve been thinking of getting a credit card recently, but you’re not too sure yet about the pros and cons, we can help. Here at Oiyo, we believe in being well informed. Take a seat, get comfy and we’ll walk you through all the ins and outs of credit cards.
Credit cards are lines of credit, up to a certain amount that allows you to make purchases, cash advances or balance transfers, with the understanding that you will repay the line of credit back in the near future. It is required that you make at the very least a minimum payment by the due date every month on the owing balance of the card.
You’re effectively borrowing money to buy things, similar to a personal loan, but you’re able to redraw on your credit card as much as you would like. The only catch is that you’re up to date with your payments and you don’t go over your credit limit.
There are a couple of hard and fast rules when it comes to applying for credit cards as well as some lender specific eligibility criteria. Make sure you have a good idea of what the eligibility criteria is before you apply or you’ll risk having your application automatically declined.
Here are some of the more common eligibility criteria that will be applicable when applying for a credit card.
To qualify for any line of credit such as credit cards or other financial products you must be at least 18-years of age at the time of application. This is a law that all lenders must follow, so it’s important to ensure that you do not submit an application before you are 18 as you will be automatically declined if you do not meet the minimum age requirements.
As a part of responsible lending practices, most lenders will need to see at least 3-months of income history. This can be either work history or government benefits or a combination of the two. This is important as your potential lender needs to see that you’ll be able to successfully service or meet your monthly minimum repayments on your credit cards if they do approve you.
This goes without saying. You’ll want to provide the best, up to date contact details to your potential credit card provider as they’ll need to get in contact with you about your application if they need to. You won’t want to miss out on any of these important communications, so make sure you are contactable.
In order to qualify for any kind of credit card, personal loan or financial product, you must be an Australian citizen or permanent resident. Potential lenders need to know that you will be present in the country and are planning to remain so, for the duration of your credit contract with them. Unfortunately, non-permanent residents who may leave the country at any time do not qualify for this specific prerequisite.
There are pros and cons to credit cards that may affect your decision to apply for one. Knowing these will allow you to be fully informed and mean you can make the best possible decision with all the information available.
One of the great aspects of credit cards is the fact that if you use them responsibly and meet your minimum repayments every month, they can help raise your credit score. The reason they’re such great credit building tools is because they illustrate your ability to responsibly handle a continuing line of credit. If you’re able to pay your balance off every month instead of just paying the minimum balance due, this is even better and your credit score will reflect this positively.
Credit cards are incredibly convenient, there’s no doubt about it. A line of credit that you have at your fingertips in the event of emergencies, unexpected costs, new furniture, holidays or even just a little bit of shopping to update your wardrobe. Having a credit card handy can definitely be a convenient luxury for many people.
Many credit card providers are now offering rewards schemes for using specific cards they offer. A great example would be the frequent flyer system employed by many airlines and their credit card partners. Under this scheme, you earn frequent flyer air points every time you pay using your card. For people who travel a lot, this can be an invaluable extra perk, helping them to pay for flights with points. Other credit cards offer cash-back, gift cards, or even merchandise for being a loyal or consistent customer.
Being able to pay your debt or purchase off over time is definitely one of the better perks of a credit card. Rather than having to offer up a heap of cash you might not necessarily have, you can make purchases on your credit card and then pay these off over the next few pay cycles. This can be such a stress relief for those of us who might not necessarily have access to a bunch of cash straight away. Being able to pay over time is much more manageable
A drawback of credit cards is that it can be super easy to get into more debt than you expected. Unfortunately, if you’re not careful it can be easy to spend more than you can afford to repay. This can lead to overdue debt on the credit card which is exactly what we don’t want to happen. To avoid this happening you need to make sure you’re up to date with your repayments so they don’t get out of hand. It’s also not a bad idea to limit your spending on the card.
One thing that seems to catch many people out is the high-interest rates on their credit card. Most purchases on a credit card will have an interest free period – say for example two months. After this interest-free period is up you’ll be charged interest on the amount of each purchase that is still outstanding.
This might not seem like a lot, but a 10-25% interest rate on purchases adds up extremely fast! This can also happen when an introductory rate from signing up with the card provider switches to the higher normal rate which can cause their interest charges on purchases to skyrocket.
Every person’s financial situation is different. So when you're considering these pros and cons of applying for a credit card, always take into account your personal situation and future circumstances.
Now, you might be wondering what the better option – credit cards or personal loans. This all comes down to personal preference as well as why you need the cash in the first place.
If you’re looking to make a big purchase such as buying a car, renovating or paying for a medical procedure and you want the reliability of knowing how much your repayments are going to be and for how long, then a personal loan may be the way to go for you.
A credit card is a great way to pay for your smaller everyday purchases as opposed to your large, one-off buys. For example, if you bought a car with a credit card the interest charges would likely be astronomical. If you’re just looking for something to cover a smaller but still exxy expense, like a dental bill, then a credit card could be ideal.
So, if you’ve made the decision that you would like to go ahead and apply for a credit card, there are a few things you should look out for when deciding which provider to apply through. Namely:
This is probably the most important thing to look out for. You want to find a credit card provider that will offer you a reasonable interest rate (effectively the cost of borrowing on the card) that isn’t going to blow your repayments through the roof and charge you an arm and a leg in interest. Ideally, the lower the better.
Also, remember not to be fooled by low “introductory” interest rates. Always confirm what the interest rate is going to be after the introductory period is up. More often than not an introductory rate that seems too good to be true, is. A credit card isn’t worth it if the rate changes to an incredibly high interest rate just a few months down the track.
Double-check how long your interest-free period will be on any card you apply for. The longer the better here as you want as much time as possible to pay off your purchases before you start getting charged interest on them.
Some credit cards or card providers will charge you an annual or even a monthly fee for using the card. Confirm what this charge is as sometimes it can be as high as a $99 annual fee.
If you’re a big traveller or you’re looking for a credit card that will offer you some sort of rewards scheme, ask around a few different providers to see what options they have available. Most providers will have at least one rewards scheme for you to take advantage of if it’s an important aspect of getting a credit card for you.
Deciding to apply for a credit card is a personal decision. Credit cards can be absolutely fantastic if you utilise them correctly and don’t get carried away. If you’re able to watch your spending and only spend what you can afford to repay and make your monthly repayments on time, then credit cards are a great option. They’re convenient, readily accessible and a great option to have on hand just in case.
On the other hand, they also have the potential to burn a hole in your pocket and enable your spending to get out of control. If this happens there is the possibility of ending up in a lot of debt that you didn’t foresee. When this happens and you don’t manage to get on top of your repayments, there’s always the possibility that your credit score is going to take a bit of a hit.
Deciding whether a credit card is right for you is very much a personal decision. Before you go applying to any providers make sure you’re well informed and know what you’re looking for in a card and you shouldn’t go too far wrong.
It can be expensive to borrow small amounts of money and borrowing may not solve your money problems.
Check your options before you borrow:
The Australian Government's MoneySmart website shows you how small amount loans work and suggests other options that may help you.*This statement is an Australian Government requirement under the National Consumer Credit Protection Act 2009.