Top nine mistakes when choosing a card
9 mistakes people make when choosing a credit card
If you choose and use it wisely, a credit card can come in very handy. Depending on what you’re looking for, the right card could help you manage your finances, get out of debt faster, or even earn rewards.
But there are also a few traps to watch out for. To help you avoid them, here are the nine common mistakes people make when choosing a credit card.
1. Not having a game plan
One of the biggest mistakes people make when choosing a credit card is not taking the time to think about how they will use it.
Before applying for a new credit card, ask yourself:
• Do you pay off your credit card every month?
• Do you carry a balance, or would like to pay off your debt faster?
• Do you use credit enough to justify paying an annual fee?
When choosing a card, take the time to realistically evaluate your budget and your spending habits, then look for a card that fits in with these [Link to “Finding the right credit card” page].
2. The devil’s in the details
Another costly mistake is not taking the time to read a credit card’s terms and conditions.
• Does it have a special introductory rate, and if so how long does this last?
• What is the purchase rate versus the cash advance rate, and when do they apply?
• Is the card subject to any retailer or foreign transaction fees?
• What happens if you miss a payment or go over your credit limit?
• What are the annual fees?
By taking the time to understand the fine print, you could avoid unexpected fees or charges.
3. Acting on impulse
Being spontaneous can be a good thing, but not when you’re applying for a credit card.
For example, a department store might be offering a discount on your purchases for one day if you open a credit card with them. While that may sound appealing, remember that credit cards from retailers can sometimes pack a much higher interest rate than standard credit cards.* And because it can seem easier to throw your purchases on plastic, those attractive discounts could soon be eaten up by excessive interest charges every month.
Make sure you always check the terms before you sign up – a credit card shouldn’t be an impulse decision.
4. Too much of a good thing
The limit on your credit card can impact your borrowing power.
If you’re applying for a home loan, for example, your lender will include your total credit limit as debt when calculating your additional borrowing capacity. If your card has a $10,000 limit, the bank will assume you have $10,000 in debt – even if you don’t owe anything on the card.
Don’t just take the highest limit or accept an increase because it’s being offered – ask yourself what limit you really need and stick to that. You can always increase it later if your circumstances change.
5. Not claiming your prizes
There’s a lot more to a credit card than the interest rate.
Take rewards cards, for example. You could be accumulating valuable points every time you charge purchases to your card, and earning rewards such as free airline tickets, gift cards, or cash back. If low interest rates and annual fees are your only selection criteria when choosing a card, you may be missing out on potential benefits.
When choosing a rewards card, think about the type of benefits you prefer. While cashback on your credit card account is a very popular option for many people, you could get more bang for your buck by choosing a card with rewards in another category.
6. An unrewarding experience
While rewards cards offer a lot of great benefits, there can be pitfalls too, including:
• Not paying off the balance. This can lead to accumulated interest fees, which could quickly wipe out any benefits you receive.
• Not using the card. If you don’t charge things to the card, you won’t accumulate points. That means you’re paying an annual fee without getting anything in return. That’s not to say spend money for the sake of it – keep an eye on your balance and make sure you can pay it off.
Reward cards work best for people who make a lot of purchases on plastic, but are diligent with repayments and repay their outstanding balance every month – not just the minimum monthly payment.
7. Not knowing your rates
When choosing a new card, be sure you understand the different types of interest rates that can apply:
• Purchase rate: The interest rate on purchases.
• Cash advance rate: The interest rate for cash withdrawals.
• Introductory rate: A low or no interest rate that is for a limited time only.
• Revert rate: The interest rate applied to your purchases after the promotional period ends – this is often the same as the cash rate.
In particular, keep in mind that any purchases you make on a card with a 0%p.a. balance transfer period will attract interest at the standard interest rates, which can put a dent in your money-saving plans.
8. Not getting the hang of interest-free days
Interest-free days are confusing for many people. For example, owning a card with a 55-day interest-free period does not mean that every purchase you make will be interest free for 55 days.
Rather, the interest-free period starts from the beginning date of your statement period. So, if your statement period began on 1 June, you would have 55 days from that date (or until 25 July) as interest-free days. The interest-free days will vary for each purchase, depending on when it was made.
There are two key points to remember. The first is that you only get purchases interest-free if you pay your balance in full by the due date every month. The second is that the interest-free period doesn’t apply to cash advances, where you’ll start to accrue interest from the time you make a cash withdrawal on your card.
9. Beware: Compare
When it comes to choosing a credit card, many people just go with the latest offer from their bank. However, this can be a costly mistake.
Every card has its own conditions and features, as well as different balance transfer fees, introductory rates and annual fees. By taking the time to compare different cards, you may discover a card that’s much better suited to your needs, with features you didn’t even think of.
As always, take the time to compare credit cards to find the right one for your personal circumstances and budget.
Looking for a card that ticks all the boxes? Compare credit card features from different banks to find a card with the benefits and features that suit you.