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How to choose the best credit card

Advice and tips to help you avoid falling into a debt trap.

hand holding credit card while pushing shopping trolley
Last updated: 02 March 2020

Credit cards come with more moving parts than ever these days, from travel insurance to frequent flyer points and rewards schemes. And issuers seem to be running out of precious metals to name their cards after – silver and gold are old hat, and even platinum doesn't have the ring it once did. Titanium, anyone?

Outright trickery in the credit card market got to a point a few years ago where intervention became necessary. In mid-2016, the federal government proposed a raft of reforms to help prevent consumers from falling prey.

CHOICE fully backs the reform of the credit card industry, which has been responsible for getting more consumers into dangerous debt than perhaps any other form of finance.  

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How do credit cards work?

Credit card issuers (mainly banks and other deposit-taking institutions) aim to get money out of you one way or another. Here are a few basics to bear in mind:

  • Credit cards with low interest rates generally charge higher annual fees, but can work if you're going to use your card as a borrowing tool and wear the interest. Paying an annual fee makes better financial sense than paying a high interest rate, especially if you only make the minimum payment. 
  • Rewards cards can also give with one hand and take away with the other. They generally come with high annual fees that can easily nullify the rewards unless you spend a lot and earn a lot of rewards points.
  • Interest-free credit cards or balance transfer deals are tempting and can make sense, but remember that the interest-free offer is for a limited time. If you still have an unpaid balance on your credit card when the offer ends, your interest will jump, often to around 20% or so.
hands holding an empty wallet over a table with credit cards

Credit card issuers have one objective – to get you to go past the balance due date so you start paying interest.

How is credit card interest calculated?

If you really want to beat the system, simply pay off your balance before the interest-free period ends. 

Knowing how much interest you'll be charged if you pay late can be tricky, since credit card providers all seem to be operating on a different space/time continuum and using different calculators.

The result is that you could have two cards with exactly the same interest rate and use them in exactly the same way, yet one may end up charging twice as much interest as the other if you pay late. (Tip: stick with the card that charges half as much.)

The underlying problem is that once interest kicks in, most credit card issuers charge daily interest – all the way back to the date of your original transactions if you go past the interest-free period. This means that for being one day late on a minimum payment, you could be charged daily interest retrospectively on all transactions for up to 55 days, not just on the amount you still owe.

Most credit card issuers charge daily interest

Example: If your credit card bill is $2000 and you repay $1900 on time, most institutions will charge interest on the full $2000 balance, backdated for up to 55 days, not the $100 in arrears.

To make matters worse, if you fail to pay your full bill on time, most card providers cancel your interest-free period for any new purchases you make from that point, until you clear the balance owing in full. 

As one CHOICE member pointedly told us: "The way my credit card provider uses one instance of late payment to effectively remove the 55-day interest-free period on new purchases is shameful. Their description of how they apply interest is ambiguous and defies rational understanding."

Yes, credit card companies have many ways of making sure you end up paying interest.

confused couple looking at credit card statement

The way interest is calculated varies, but if you pay after the balance due date, you'll probably end up paying more interest than you expected.

Why you should pay more than the monthly minimum

Credit card issuers hope that you'll only make the minimum payment each month, drawing out your debt and the amount of interest you'll end up paying for as long as possible. Paying more than the minimum each month makes a big difference. 

How to pay off a credit card

Example: If you owed $5000 on your credit card at 18% interest and made only a minimum monthly payment of $102 (about average for a $5000 balance at that rate), you'd end up paying $17,181 over the 33 years it would take you to pay off the card. 

But if you paid $246 a month, you'd end up paying $5902 over the two years it would take you to get out of credit card debt, saving yourself $11,279 – and 30 years of financial stress.

What is a balance transfer card?

Credit card companies love to advertise low- or no-interest rates for debts transferred from other cards, supposedly to help you get out of debt. But it's just a ruse to bring in new customers and get them paying interest down the track.

The interest rate applying to the balance transfer generally ranges from 0% to 5%, for a period of four months up to as long as it takes you to repay the debt. It can seem like an offer too good to refuse.

Bear in mind, though, that the low- or no-interest offer generally applies to the amount you transfer over from another card only – not to any new purchases with your new card – and you'll also likely be charged a fee for the amount you're transferring, which can be as high as 3% (meaning you'd pay $30 to transfer over $1000 and $300 to transfer over $10,000).

Balance transfer cards can go terribly wrong

The longer the interest-free period, the higher the balance transfer fee. 

Switching to a no- or low-interest balance transfer credit card can be a good way to get a handle on your debt or avoid making repayments for a certain period of time, but balance transfer cards can go terribly wrong.

Also, flipping your debt to a low- or no-interest promo deal too often can affect your credit rating, as can having multiple credit card applications rejected.

Credit card rewards schemes

Unless you're a big spender, credit cards with rewards schemes are mostly a gimmick, and they nearly always charge hefty annual fees and high interest rates.

A CHOICE investigation of 63 rewards credit cards found that consumers would need to spend at least $2000 a month to get any return, while those who spent $1000 a month or less would pay more in annual fees than they got back in rewards.

Cards that reward you with frequent flyer points can be a better deal than gift card or cash back rewards cards that accumulate at a much slower rate.

What to look for in a credit card

If you always pay your balance on time:

  • Annual fees: Look for cards with no annual fee and one that offers a generous number of interest-free days on purchases.
  • Number of interest-free days: You should have at least 14–25 days after the statement to clear your bill, thereby giving a maximum of 44–55 interest-free days on purchases.
  • Overseas transactions: Look for low currency conversion costs.
  • Rewards programs: You generally need to spend at least $2000 each month on your card to justify the annual fee for a rewards scheme. The schemes deliver little or nothing to consumers who spend less than $24,000 a year on their cards.

If you might not pay your balance on time:

  • Consider flicking your debt to a card with a low- or no-interest rate for balance transfers. These cards can give you some breathing space to get your finances back on track.
  • If you transfer your debts to a low-interest card, don't use it for new transactions as they'll attract interest from day one. Cut up your old card if the temptation to keep spending and racking up debt is too great.
  • Consider using a debit card instead. EFTPOS is a convenient and low-cost way to access money from your bank account. And MasterCard and Visa Debit cards let you transact online and overseas just like a credit card. Many financial institutions now offer debit/ATM cards with combined EFTPOS and MasterCard or Visa functionality.
scissors cutting up a credit card

If you transfer your balance to a credit card with a lower interest rate, cut up the old card.

Why you might want to reconsider getting a credit card

Credit card companies market their products aggressively and cleverly, so it's important to keep your eye on the fundamental purpose of these financial products – which is getting you to borrow money and pay interest.

Using your credit card to borrow money so you can buy something is about as unsound a financial decision as you can make, unless you pay off the balance before the interest kicks in.

If you end up paying interest, the rates are bound to be much higher than those available outside of the credit card market, say with a personal loan.

As of December 2019, total credit card debt in Australia stood at about $49.5 billion

And the card issuers can really stick it to you when it comes to interest rates. In an earlier investigation, CHOICE reviewed credit card interest rates from 55 major issuers over a five-year period and found that only 16% dropped their rates in line with the RBA cash rate over that period.

Instead of interest rates and annual fees going down as borrowing costs got progressively cheaper for the banks, both went up. 

Whether or not you end up paying interest on your credit card depends on whether you pay off the balance during the interest-free period, which can be as high as 55 days. The credit card issuers hope you don't do this, since interest payments are central to how they make their money.

And their master plan for getting us into debt seems to be working. As of December 2019, total credit card debt in Australia stood at about $49.5 billion, and $28.3 billion of that was accruing interest. You can see why financial service providers really like credit cards.

Credit card reforms

In early 2018 a federal credit card reform package was passed by Parliament that includes many of the consumer protections CHOICE has been calling for in recent years.

Credit card issuers are now:

  • banned from approaching people with unsolicited credit card limit increases
  • required to provide an online option to cancel cards and reduce credit limits
  • required to simplify the calculation of interest
  • required to implement tighter responsible lending obligations.

National Debt Helpline: 1800 007 007