Welcome to my Credit Cards Australia Review. Today I’ll discuss Credit cards which receive a lot of mixed publicity, with a lot of people arguing for and against their use. Today, I’m going to cover whether credit cards are a useful tool for improving your personal finance or a money pitfall that can cause you considerable debt.
Credit cards work by allowing you to make purchases with borrowed money from a bank or other card issuer. This borrowed money is derived from a line of credit, which is a pre-approved amount of funds allocated to the card. By having access to credit, you can purchase things without having the physical cash in your wallet or bank account at the time of purchase, you can also use them to purchase things online or over the phone without the use of cash.
Each month, you’ll receive a statement that will detail how much money you’ve spent on your credit card and whether you owe any interest. As you are borrowing this money from the bank as opposed to spending your own money as you would with debit cards, this borrowed money can incur substantial interest payments between 12-20% depending on the card you have selected.
However, it is important to note that credit cards offer interest-free periods which are typically every 55 or so days, and if you manage to pay off all the debt on the card by this period, you won’t pay any interest payments.
Now that you understand how credit cards work, you might be wondering what uses they may offer and the answer is dependent on several factors. However, there are three main reasons for owning a credit card in Australia and they are as follows: You can point hack, use interest-free periods to invest and accumulate further wealth and lastly, they can establish a credit history.
Some credit cards offer unique perks to their users such as the ability to get cashback on purchases, free international transaction fees and point rewards from services such as Flybuys, Qantas and Virgin among others. While these cards often come with fees, depending on the frequency in which you use your credit card, how much money you spend on a routine basis and whether you do a lot of travelling, these points and benefits can end up saving you money over time, assuming that you pay off your debt during the interest-free periods.
Another way you can maximise these benefits is through a thing called point hacking. Point hacking occurs when you sign up for new rewards cards to take advantage of their sign up bonuses. In Australia, a lot of cards offer significant flight points for people who sign up and spend X amount of money within X amount of months.
If you would normally spend that amount of money, you can accumulate significant flight points and benefits by routinely swapping out your cards for new ones that offer bonuses. Most of these bonus cards tend to offer first-year free subsidiaries of significant discounts during their first year, meaning that you can maximise your returns whilst lowering your ongoing expenses with the card.
While point hacking is quite a common strategy, many people tend to underestimate the potential that the interest-free periods of credit cards offer. If you choose to utilise the interest-free period of a credit card, you can have up to 7 weeks worth of your pay at your disposal for investing/saving without incurring any financial losses.
If you invest in individual stocks or cryptocurrencies, you can use a credit card to cover all your daily expenses while holding a cash reserve to invest in dips in the assets you are looking to buy if you are that way inclined. Assuming you have enough cash to cover the balance owing at the end of the interest-free period, you will have more liquidity and potential to invest.
On a more FIRE aligned method of investing/saving, you can put your money into a high-interest savings account, where you can make a slight increase on your cash before covering the credit card repayments. Perhaps the safest and most cost-effective way of using a credit card for this purpose is to use it to cover all your expenses while dumping all of your income into an offset account on your house or investment property.
If you are a homeowner, having your money in the offset until the day before your credit card repayment can offset your mortgage payments substantially over a long period, as you decrease the balance you owe interest on during the 55 days.
This is more for American readers and other internationals, as a credit score isn’t particularly pertinent in the Australian system. However, having a credit card, even a no-thrills one can be a useful way to build a credit score. Through establishing a credit score, you can show banks that you have a history of being able to cover your debt which is looked upon favourably by lenders for when you decide to get a mortgage loan or perhaps an investment loan down the track. This can also be useful when trying to rent a house, as homeowners will typically look favourably upon people who have a good history of making payments on time.
While the above perks may make the idea of a credit card sound appealing, there are reasons for some people to not use a credit card. Some of the reasons against using a credit card is the potential for accumulating debt, the misconception that point hacking is always profitable and the ongoing fees.
Credit cards can be a useful asset when paid off on time, however, if you fail to pay off your debt before the interest-free period you can end up paying a substantial interest fee on the borrowed money. This can be particularly dangerous for people who lead high consumerist lifestyles, as the convenience of being able to afford things immediately without the ability to finance them in cash can lead to overspending.
If you are prone to impulse buys or buying things that you don’t necessarily need, then a credit card can be one way to accumulate a lot of debt fast. Similarly, if you are forgetful or have a habit of missing deadlines then you can accidentally fail to make payments and get hit with unnecessary interest payments. If you fall into either of these categories than a credit card may do you more harm than good.
Another common issue with credit cards is people who incorrectly utilise point hacking. For point hacking to work, you have to spend money that you otherwise would have under normal circumstances with your debit card on your credit card. However, a common issue people experience is that they over-spend or buy things that they otherwise wouldn’t have to meet the sign-up bonus spendings of their new credit card.
If you are spending an extra $1000 over three months to get $500 worth of flight points then you aren’t saving money, you are losing it. Similarly, if you are someone who doesn’t like to travel a lot but you’re going out of your way to point hack on flight points, there’s a significant chance that you’re just paying unnecessary fees to get points that you potentially won’t lose, which will also hurt your profits.
Many credit cards incur a yearly renewal cost, which can cost several hundred dollars. Similarly, many cards have reductions in their perks after the initial bonus offering, meaning that the ongoing costs can significantly outweigh the perks and benefits offered by the card. For this reason, if you aren’t routinely changing your credit cards or looking for the best offer on the market, it can be counter-productive to hold onto the same card unless you have determined that the bonus points and perks cover the yearly expenses.
As seen in both comparisons, credit cards can have their uses and downfalls. If you are someone who enjoys flying or the perks offered by credit cards, have an offset account or like to invest in volatile assets and if you are looking to establish a credit score, then credit cards can be useful financial tools.
Alternatively, if you are prone to overspending, you don’t need the perks offered by credit cards or if you aren’t prepared to spend time routinely comparing cards and their bonuses, then they may cause you more harm than good when it comes to your finances. If you do decide to get a credit card, make sure you do your research to find the card that best suits your needs and spending requirements and ensure that you continue to compare it with other cards on the market to maximise your results.