There are a number of different types of credit cards available on today’s market, each bearing its own advantages and disadvantages. The majority of credit cards currently on the market can be split into 5 main categories, each with an emphasis on one or two particular features in order to attract its intended market. These 5 categories are:<
>- Low interest on purchases – allowing consumers to pay a low rate when using a credit card to make purchases
- 0% Balance Transfer period – allowing consumers to transfer a balance from an existing credit card and pay no interest on the balance for the duration of the interest free period
- Low annual fee credit cards – a card that does not cost the earth to own
- Reward credit cards – offering consumers a range of attractive rewards built up each time the card is used to make purchases
- Secured Credit Cards – used by those that have a bad credit rating due to events in the past, such as unpaid bills; frequent charges due to going overdrawn etc.
There are a number of other factors that can be explored, but these tend to spawn from one of the categories mentioned above, so I will stick to these for now and go through some of the potential advantages and disadvantages of each.
Low Interest Credit Cards
These cards are generally used by people that don't always clear their balance off in full, so look to pay the least amount of interest as possible. If used properly, these cards can be an effective financial tool giving you the flexibility to spend as required.
As with all credit cards, it is recommended that you always pay off the full outstanding balance at the end of each month. This will allow you to avoid paying any unnecessary interest, but be wary of low rate cards, as some come with no interest free days, so any purchases will be instantly subject to the specified interest rate. If you find you can’t afford to pay the full amount, always make sure you pay at least the minimum balance to avoid any charges and prevent your credit rating to diminish.
If you intend on paying off the full balance at the end of each month, this type of card might not be your best option, as most credit cards provide users with up to 55 interest free days on purchases as standard, so as long as you pay off any outstanding balance within this period, you will never have to pay any interest.
Some low interest credit cards offer an introductory low interest period, which means that your purchases will be subject to the low rate for the duration of this period. Before applying for any card, always make sure you are aware of what the rates will increase to after the inroductory period ends as you might find that the attractive offers don't seem as appealing later on.
Balance Transfer Credit Cards
Balance transfer credit cards can be used by consumers that have a balance that they would like to move across, usually due to better rates offered, or because they are ready to clear the debt within the introductory low interedt period. There are some great deals when it comes to this feature, with some cards offering 0% introductory periods, giving the user a tool for freezing interest for the specified period of time.
This type of credit card can provide an effective method for clearing debt. For example, if you owe $5,000 from your current credit card and you’re paying 12% interest per annum, your $5,000 will increase by $600 after just one year. The beauty of transferring your balance across to a 0% card is that you can avoid this interest and pay off you debt before the interest free period expires.
The best way to clear your debt is by dividing what you owe by the number of interest free months available on your new card, then pay this amount each month. For example, you find a credit card that offers 0% on balance transfers for one year. Divide your $5,000 by 12 to get just over $416, then pay this amount each month and be debt clear in a year.
You need to remember to pay off your balance every month, even if it's just the minimum required amount, so don't think of it as a place to hide your debt and forget about it! Late payment can result in loss of the interest free period, so make sure you’re serious about clearing your debt.
Something you should always remember about balance transfer credit cards is that they should never be used for the 0% purchases feature unless you plan to clear the full balance within the 0% purchases period. This is because once you balance has been transferred, it will take priority in terms of repayment, so use your card to buy something, and when you come to pay it off you will find that the payment will come off the balance transferred, while your purchase will remain unpaid leaving it subject to interest until the entire balance is paid off.
Low annual fee credit cards
Most Australian credit cards charge an annual fee to own and although these fees tend to be fairly low, you can avoid paying them all together. This may sound great, but if used by the wrong type of credit card user they can be a very expensive source of credit. This is because to satisfy one feature, other features are effected or even sacrificed all together. For example, you may only have to pay $20 per year to use a credit card, but the interest rate is above average and your interest free days are withdrawn all together.
HSBC are currently offering consumers a 1 year no annual fee credit card, that increases to $49 per annum after the first year. With this card you still get your 55 interest free days so can avoid paying any interest if balances are paid off in full.
Rewards Credit Cards
If you like to use your credit card to cover most of your spending, and you always pay off your balance at the end of every billing period without fail, you may be the perfect candidate to take advantage of a rewards credit card.
You can choose from a range of credit cards to find a reward scheme that best suits you, with some rewards including airmiles, merchandise, vouchers, and much more.
Rewards are accumulated as points provided for every dollar spent using your card. You can easily boost your point by using your card to make as many purchases as possible, such as grocery shopping, fuel, and bills.
You will probably notice that reward cards cost more in annual fees, so you are only likely to benefit from this type of card if you use it regularly. If you are unable to pay your balance off in full each month, you are likely to end up paying more in interest than you earn in rewards.
Secured Credit Cards
If you’ve ever experienced difficulty with credit in the past, or you’ve had problems repaying your financial obligations, you could have a damaged credit rating, making it difficult to be approved for a credit card. This is where secured credit cards step in, as they are designed for people that have a bad credit score, and can be used to help rebuild your rating. The downside to these types of credit cards is that the rates tend to be significantly higher than those found on a normal credit card, so make sure you always pay of your bill on time to avoid paying high charges.
If you use a secured credit card wisely, you can benefit from a useful spending tool, while improving your credit score, as you are demonstrating that you can be trusted with credit.
To earn initial trust from your credit card provider you must put first down a cash deposit in order to get the card. This is the “secured†part of the deal. Deposits can range anywhere between $100 and $250, on top of the annual fee.