How do you use your credit card? This is a vital question to ask yourself before applying for any kind of credit card. Often we trick ourselves into believing we have a usage style that is anything but the honest truth. For instance, many people will say they ‘repay their card in full every month’, however in reality, they may only do this occasionally.
Others might believe they make minimum repayments, when in honesty they instead opt for large lump sum repayments that go above and beyond the minimum when and if they can afford it.
These are just a few examples of how people actually use their credit card, so with this in mind, I want to pose a few questions to you to help assess what kind of credit card user you are and in turn, hopefully help you understand what is important to you in a credit card.
Are you looking to earn rewards points?
If so, do you actually spend enough to make it worthwhile? This is the biggest downfall of people looking to obtain credit card reward points. Yes you may get something for free, though at what cost? Is the annual fee greater? Is the interest rate higher? Is it a mismatched card for your repayment style?
Remember, nothing comes for free. Often rewards card seem too good to be true, which is often the case.
More: Most reward cards just don't reward
Are you looking to pay in full each month?
If you do honestly repay your card in full each month, do you really need the credit card? Or is it just a safety net to help you have easy access to money? Visa debit cards can also offer convenient access to your funds in a similar way to that of a credit card (but instead utilising only your own money).
Others repay their card in full each month to utilise the interest free days offered on the card. This means their actual money (earned cash) can stay within their home loan or other interest charging facilities to ensure they pay less interest and every dollar is working harder for them until the very last minute when full repayment occurs.
It must be said however that the idea of using a credit card to utilise interest free days and maximise your money can be tricky. If you slightly fall off the band wagon and splurge on your open line of credit, you can instantly ruin your established game plan.
Are you simply looking to transfer an old debt to your card to help you pay it off?
Many people look to new credit cards to transfer the old debt onto a new card; this is called a ‘balance transfer’. The benefit most people see in this is that they can utilise an interest free period for the existing debt on the new card and focus on repaying it while little to no interest is charged.
What you need to ask yourself however is will you actually be able to pay this debt off within the time frame given? Remember that the interest free balance transfer periods often start from the day your application is accepted, so the longer you don’t transfer the debt, the less time you will have to enjoy interest free days. You also need to fully understand the penalty and/or interest rate the transferred debt will switch to once your time period is up.
Do you intend to pay off your card in lump sums?
Are you the kind of person that doesn’t even know what your minimum repayment is? I am that kind of person. Not because I have money coming out my ears (which I certainly don’t), but instead because I am someone who pays lump sums whenever I can to get rid of the debt. This means that I often pay more than the minimum as I am trying to reduce the overall debt amount and can’t allow myself to build a savings account while I have debts that are costing me money.
In these kinds of circumstances, it is wise to investigate what kind of cards will actually benefit you. It may mean you need a low interest rate or perhaps a card that doesn’t have large penalties for not making a minimum repayment (to help give you time to source your next lump sum repayment).
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Alex Wilson is the founder and editor of Savings Guide, Australia’s number one saving money website. For regular money saving tips, visit Savings Guide or follow Savings Guide on Facebook.