For years I have campaigned against the credit card, advocating instead the use of cash, debit cards and other sources of ‘real money’. However I now realise I have to be pragmatic, credit cards are a reality and people are always going to have them. All I can do is recommend to be careful and provide tips to help people use them wisely and select them wisely.
Anyways, I detract. Today I want to look at how to choose the best credit card for your individual needs by breaking down the different types of credit cards available.
Types of credit cards available
Credit cards come in all shapes and sizes with a range of perks, features and benefits. Typical credit cards can be organised into the following categories:
- Reward cards
- Low interest credit cards
- No annual fee cards
- Gold and platinum cards
It’s important, when looking for a credit card, to find a card that suits your needs. With proper research, you take the first step to positive credit card usage and help alleviate the chance of getting into credit card debt.
Now let’s dig a little deeper into the different types of credit cards and what they do.
Reward program credit cards
What is a rewards program credit card?
A rewards credit card allows you to earn reward points from your credit purchases. What the rewards are, and how they can be used, depends on the credit card. You might earn frequent flyer points or get a gift card for a supermarket or store like David Jones.
Some rewards cards come with international travel insurance or additional purchase security benefits. Of course, the only way to earn these points is to spend money on your credit card.
Who are reward cards often for?
Reward cards can work well for many of us. Some reward cards are geared specifically towards the frequent traveller- these cards often reward users with frequent flyer miles and travel insurance. If you use your credit card regularly for everyday purchases and are capable of consistently paying it off within the interest-free period, then a rewards card might work well for you.
How could a reward program card be the the best credit card for you?
If you already use your credit card frequently, you want to ensure that your card is at a relatively low interest, that you can pay off the balance at the end of the month, and that- if possible- you’re making your dollar go further. A way of doing that is signing up to a rewards card. Perhaps you can use a gift card for the Christmas shopping, or use the frequent flyer points to make your next holiday a more frugal adventure.
The most essential aspect when looking at rewards cards is to ensure that it matches the way you spend money. There’s no point getting one that doesn’t reward you at Coles, if that’s the major area of expenditure. You need the rewards to match the areas in which you spend the most money.
What are the potential downfalls to watch out for with reward program cards?
- Spending more than you would usually in order to earn rewards points.
- Spending money on unnecessary items due to rewards point or bonus point incentives.
- Being incapable of clearing the balance at the end of the month and therefore losing money on interest, negating any savings you make through a rewards system.
- Signing up to a rewards card with rewards you are unlikely to use, or can’t use before they expire.
- Rewards cards come with annual fees, sometimes high annual fees. You need to be certain the rewards will vindicate the extra expenditure on fees.
- A recent report stated that you need to spend around $18,000 on your card to qualify for around $100 in gifts. Is that really worth it?
Tips and tricks to maximise points
- Concentrate on one card, and ensure it reflects where you usually spend your money. You want to use your card as often as possible, as long as you can clear your balance by the end of month. Best idea is to go home and transfer the cash onto the card immediately.
- Choose a card that matches with your customer loyalty. For instance, I would always choose a rewards card that flies with Virgin and affiliates as that is who I fly with. Choosing a Qantas card would be ineffective and result in too few benefits to make the fee on the card worthwhile.
- Organise how you will use your points. Whether you’re saving for a big expenditure, or using your rewards regularly, you need to be aware of how long you have before the points expire.
Low interest rate credit cards
What is a low interest rate card?
A credit card that offers a low rate of interest on purchases. Often the card will also come with a 0% interest grace period for new cardholders, sometimes 5- 6 months.
Once that time has elapsed, you’re looking at an interest rate of approximately 12- 18%. Usually, these cards come with a low annual fee.
Who is best suited to a low interest credit card?
If you can’t pay off your balance at the end of every month, you should certainly think about moving your balance across to a low interest card. If you’re totting up interest on a card, it’s essential to keep your interest rate as low as possible. Otherwise, you’ll find it increasingly difficult to get on top of the credit repayments.
How can a low interest card work for you?
Firstly, you’ll be paying less interest on purchases. Should something happen, you’ll have less interest to content with at the end of the month. Similarly, if you’re finding it hard to get on top of your repayments, transferring to a low interest card might be the smartest decision.
For people in that position, it’s also worthwhile to think about the low balance transfer rate and 0% interest on future purchases for the first couple of months of having the card.
What are the common downfalls of a low rate card?
You might find it hard to get a low interest card if your credit history is poor, or you don’t have any credit card history.
Conversely, if you don’t often use your card or consistently pay off your purchases within the interest free period, a low interest card may not offer the benefits you are looking for, and something like a rewards card might work better for you.
Tips to make your low interest credit card work for you:
- Just because it’s low interest, doesn’t mean its no interest. The sooner you have the balance clear at the end of every month, the better.
- Not all low interest credit cards are created equal. Look for ones with very low annual fees or attached loyalty programs.
- Research carefully. Make sure you understand the grace period- if there is one- for new cardholders, and whether the interest rate is fixed or variable.
- Don’t get confused by the projected interest rate, this does not apply to cash withdrawals, only to purchases. Your cash rate will still be upward of 20% and can make things very tricky, very quickly.
No annual fee credit cards
What is a no annual fee card all about?
A credit card that tells it how it is, with no annual fee for using the card.
Who is a no annual fee card for?
This card is perfect for people who rarely use their credit cards, save their credit cards for an emergency or religiously pay off their credit card before the interest period.
If you’re never earning any interest on your card, it’s more important to save money on the annual fee than it is to consider how the interest rate would affect you.
With a higher interest rate than low interest cards, this is not the one you want to use if you are perpetually paying interest on your card.
How can a no annual fee card be good for you?
A caveat here. It is essential, before committing to a card without annual fees, that you can be certain you’ll be able to clear the card at the end of every month. This to me suggests you need an emergency fund and some pretty solid financial skills. With that said, you could save yourself a couple of hundred dollars a month by avoiding paying a fee on the card you barely use.
Whats bad about no annual fee cards?
- If you end up being unable to pay off the balance at the end of the month, you’ll be facing a higher interest rate which, as we all know, has the potential to spiral out of control.
- With a card without annual fees, you’re unlikely to be looking at a thorough loyalty system or lots of benefits. Accept it for what it is; simple and easy to manage.
- Know how long your annual-free period is. It’s a shock to the system to imagine you’ll never have to pay annual fees, only to discover that’s an offer that only lasts for the first year.
Tips to get the most from your no annual fee credit card:
- Know your usage. With a higher rate of interest, it’s important to keep a close eye on your credit card balance.
- Pay off your purchases immediately. It’s a good idea, especially if you’re unused to credit, to transfer the money onto your card immediately.
- Use it to improve your credit history. Even by making a small purchase, and paying it off within the allotted period, you can start improving your credit rating.
What are gold and platinum credit cards?
The luxury liner of credit cards, the courtside seats of the world of plastic, platinum and gold cards bring with them a variety of rewards, points and benefits, as long as you have the cash to back it up. Gold cards are pretty impressive and platinum cards are a status symbol, as well as a means of earning high rewards from credit usage.
Who are gold cards and platinum cards for?
People who pass a reasonably high (for gold) and stringent (for platinum) threshold of income and credit rating. You’ve heard of the saying that money makes money, I’m sure. In this instance, the low interest rate and high credit limit of these cards are due to your money.
The bank that gives you the card is sure you can cover your debts, and their happy to give you a pretty card in order to start spending.
How can a platinum credit card or gold card work for you?
The benefits that come with gold and platinum cards are impressive. Instead of a one point to one dollar spent system, you could be looking at three times that. Some cards offer 100,000 membership points if you put more than $500 on the card in the first month. Others get you straight into exclusive airline lounges, inject thousands of frequent flyer points to your balance and include 24 hour personal assistance with credit issues.
Another benefit is gold and platinum cards bring with them excellent insurance on purchases made with the card. They may also have travel insurance, overseas medical insurance, flight inconvenience insurance.
What are the potential pitfalls of platinum/gold cards?
The potential pitfall for most of us in getting a gold- and, most certainly, in getting a platinum- credit card is we don’t meet the credit and income standards. Our personal finance situation is unique, and sometimes we are unable to meet the threshold to gain the credit card.
The other issue is the annual fee. Like all exclusive things, a gold or platinum cards costs. Expect to pay anywhere between $80- 300, although some cards have no annual fee for the first year.
Tips and tricks for getting the most from your platinum credit card or gold card
- Ensure the card rewards you for how you spend money. You’re looking at a low interest rate and high limit, but it’s important that your rewards and benefits are ones you will use.
- Make sure that the amount you are saving vindicates the amount you spend on the annual fees. Otherwise you may as well get a card without annual fees and throw some status around in a flashy car instead.
- Research your insurance benefits in-depth, in order to ensure you don’t get caught out overseas.
- Keep an eye on exclusive offers. Through affiliation, using a gold or platinum card could save you money as they offer a variety of discounts. It never hurts to ask anyway.