Credit cards - Which one should you choose?

Credit cards can be a useful tool - and when you pick the right one they can even be a cost effective way to access a loan or additional features. However, if you have the wrong credit card for your needs, it could end up costing you big time. In worst case scenarios, credit cards can contribute heavily to bad debt, financial hardship and even bankruptcy.

That’s why it is important to get the right credit card for your needs, and to routinely assess if you would be better off switching to a more suitable product. 

Check out these common spending categories to help you decide which type of card will suit you, and don’t forget, always get individualised financial advice if you’re uncertain.

Impulse buyer/shopaholic

If you’re the type to spend up big on a whim, or find yourself surprised by a big credit card bill each month that never quite seems to get paid off, you may be better off switching to a debit card. You can still make purchases online and receive all the benefits of a credit card but you only spend what you can afford, or you’re forced into saving for those retails binges. If you’d like funds for an emergency, start a savings account purely for this purpose and enjoy earning interest.

Often in debt

Sometimes, the right credit card can be more valuable than taking out a personal loan or organising finance. It offers flexibility and can encourage you to pay down debt quicker. However, you’ll need to get a low rate credit card, avoid making cash advance purchases (drawing money directly out of the account) and be disciplined enough to pay down the debt effectively.

For whatever reason, if you don’t pay off your card in full each month, you’re usually better off signing up for a low rate credit card. The money you save on interest will typically outweigh the benefits of other cards like a low annual fee or additional features. If you already have a card charging a high interest rate and want to balance transfer, make sure you get a card that reverts to the low purchase rate and not the high cash advance rate.

Paid in full

If you repay your credit card each month like clockwork, you don’t need to worry as much about interest rates as you should rarely have to pay any interest. In these cases, the biggest expense with owning a credit card is often the annual fee, which is why you should look for a card with a low or $0 annual fee. The only reason to pay a fee or use a platinum card, is if you use the features frequently or need a really high credit balance (see below).

Freebies, points and benefits

Known as premium credit cards, gold and platinum cards often feature additional benefits like rewards points and travel insurance. Despite the additional perks, premiums cards typically cost more money both in terms of interest and annual fees. Unless you pay the full balance each month and utilise the benefits often, you shouldconsider whether it’s more worthwhile opting for a cheaper credit card and instead using the money you save for the things you want.

For example, our research indicates that unless you spend around $30,000 or more per year on your rewards credit card, the benefits are rarely worthwhile and sometimes don’t even cover the annual fee. The same goes for insurance – if you’re travelling with your family, are happy with the cover and do so frequently then it may be worthwhile. If you’re a solo traveller who doesn’t get away often, it could be better just to purchase the travel insurance when you need it.

Not all credit cards are created equal, and the wrong one can cost you dearly. Have you saved yourself money by switching to a more appropriate card for your needs?