How to choose the right credit card

Credit cards are a convenient way to pay for things, but that convenience can come at a cost. The kind of credit card you should get depends on how you want to pay off your debt. And choosing the wrong one can seriously damage your finances.

A recent Canstar case study showed that choosing the right credit card when transferring a credit card balance of $5000 could save as much as $700 over the course of a year.

Credit cards have different features to suit different types of spenders and it is important that your credit card matches your spending patterns and financial behaviour.

If you always pay off your credit card in full each month, look for one that offers interest-free days. This means you pay no interest for a certain number of days after making a purchase (for example, 55 days).

These cards may charge higher interest rates and annual fees, but if you pay off your debt within the interest-free period, you’ll avoid paying interest altogether, so the higher annual fee may be worth it.

If you know you won’t be paying your debt in full straight away, consider a card with no interest-free days. You’ll usually pay lower annual fees and less interest, either from the day of purchase or the day your monthly statement is issued.

Credit card balance transfers
If you need to consolidate your credit you may want to consider transferring your outstanding balances from one source to another. This is attractive because you will usually be offered a lower interest rate for a certain time (for example, 4.9 per cent for six months).

You can get the full benefit of this by paying off the balance transfer amount within the balance transfer period. Just make sure you check the interest rate that will apply once the balance transfer period is over.

If you use your new card to buy something, your purchase will usually attract the full interest rate of the new card (not the special balance transfer rate). It is a good idea to check how different credit card features may apply when you transfer your balance to a new card. For example, you may be unable to take advantage of any interest-free period on new purchases until the balance transfer amount is paid in full.

After transferring your balance, close the old card. If you don’t, you may still have to pay fees, even if you no longer use the card. Closing the account also reduces the temptation to spend on both cards, which would add to your debt.

Payments you make on your new card could be applied to the balance with the highest interest rate (for example, purchases you made at the standard interest rate or cash advances at the cash rate, whichever has a higher interest rate).

If you have not paid off the full balance transfer amount when the balance transfer period ends, the amount remaining will be charged at the standard interest rate or cash advance rate (which may be higher).

It’s worth shopping around to find the best credit card for you. It might be easy to get a card with the financial institution you normally use, but you could find a better deal elsewhere.

For more information on choosing the credit card that is right for you, visit moneysmart.gov.au.

Written by Ben

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