Choosing a credit card

Part 1 of the credit series compared the different types of credit options out there. This week will focus specifically on credit cards and how to choose the right one. Picking a credit card can be daunting, especially if it's your first one, so it's important to thoroughly research all the types of cards first.

The interest-free card

According to ASIC's Money Smart, the type of card you should get depends on how you want to pay off your debt. If you will be able to pay off the full credit card balance each month, you should look for one that offers interest-free days to avoid paying interest for a certain number of days after making a purchase. 44 and 55-day interest-free credit cards are common options.

If a credit card states that its interest rate is zero per cent, it's probably too good to be true - according to creditcardfinder.com.au, this usually refers to the introductory rate that is only valid for a certain number of months. Be sure to read the terms and conditions first before committing. Consider a card with zero per cent interest rate on balance transfers for a limited time, as you will be able to transfer the card balance over to another card and pay no interest for that period.

The low-interest card

Low-interest cards are a good option, particularly if you don't forsee yourself paying the full balance off each month. While it is always recommended that you pay off the entire balance, for some this may not be possible. A low-interest card (typically anywhere from 11% to 16%) will ensure that you pay less as compared to a higher-interest card (typically 19% or more).

The no-annual fee card

As its name suggests, this type of credit card has no annual fee, essentially making it a 'free' card. When researching, you will find that the annual fee usually increases with the number of rewards the card offers - it can go up to as much as $500. If you're not prepared to spend that much, or don't think you need those rewards, opt for a no-annual fee card. This also suits people who rarely use their card.

The rewards card

Many people shy away from rewards cards because they tend to be more expensive, but if you can afford the annual fee on rewards cards and believe the rewards on offer are relevant to you, then this type of card is right for you. The main benefit of a rewards card is the ability to earn points as you spend, which can be redeemed for cash, air miles, merchandise or charities, for example.

Rewards cards typically come in bronze, silver, gold and platinum (or their equivalent) tiers, which you can progress through depending on how much you spend and earn - hence, this type of card usually benefits those with a higher income the most. Other characteristics of a rewards card holder include a frequent traveller and heavy credit card users.

Many department stores (Myer, David Jones), also offer their own credit cards (usually backed by American Express, Visa or MasterCard) so if you regularly shop there this may be something you want to consider.

However, you should be aware of the typically high interest rates on rewards cards (usually around 19% or 20%) and the minimum annual spend you may be required to make. You also need to earn at least $45,000 a year to qualify for a rewards card. Remember to read the terms and conditions - do you lose any rewards if you make a late payment? Are your rewards capped? Are you encouraged to redeem cheaper items? Are there any other hidden costs?

These are some things you may want to consider as a rewards card is the most expensive out of all the options canvassed so far.

Before you apply...

D&B also advises obtaining a copy of your credit report before you apply for credit, to ensure that all information in your report is accurate. It also shows you what your potential lenders are seeing when they are assessing your creditworthiness - you can get a copy of your credit report here.

Next week, Part 3 of the credit card series will focus on how to manage your credit card.

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