If you’re thinking about applying for a credit card, or any other type of credit, it’s important to weigh the potential advantages against the risks.
What are the benefits of a credit card?
1. You can take advantage of credit card interest free days
Most credit cards offer an interest-free period on purchases, usually up to 44 or 55 days. This is the maximum number of days you won’t be charged interest on your purchases. It applies as long as you pay your closing balance in full by the due date each month.
If you don’t pay off your closing balance in full, or simply make the minimum repayment, you’ll lose your interest-free period and be charged interest on your unpaid balance.
The interest-free period also only applies to purchases. It doesn’t apply to other types of transactions, such as cash advances.
2. A credit card can help in an emergency
Credit cards can be useful in an emergency situation if you need to pay for something but you’re short on cash. Remember, though, you can be charged interest if you don’t pay your balance in full on time.
If you only intend to use your credit card for emergencies, you may want to look for a card with no annual fee.
Another option could be to create an emergency fund to help cover any unexpected expenses that crop up. You might also like to try the Canstar Budget Planner Calculator to help you manage your personal budget. This could help you avoid situations down the track where you need to rely on a credit card for emergency funds.
3. You can earn credit card rewards and points
Some credit cards allow you to earn rewards such as Airpoints, rewards points or cashback on eligible purchases. For example, BNZ is the winner of Canstar’s latest Most Satisfied Customers | Rewards Credit Cards Award, for its great cashback and Airpoints rewards.
However, if you think you may struggle to pay off your balance in full each month, you may be better off with an interest-free or low rate credit card, or sticking to a debit card. Any benefits you gain from a rewards card could likely be outweighed by the interest and fees you would be charged.
4. Weigh up credit card insurance
Some credit cards (usually more premium ones) provide some complimentary insurance. For example, some credit cards come with complimentary travel insurance and rental vehicle excess insurance.
Other common insurance offerings include purchase protection insurance, which can cover you against loss, theft or accidental damage to personal items purchased with your card, price protection insurance, which may refund you the price difference if an item you bought using your card has dropped in price, and extended warranty insurance.
As with any insurance product, take the time to understand the limits and exclusions of any cover you may get and consider your personal needs and requirements.
What are the disadvantages of credit cards?
1. You may be charged interest on your credit card
If you don’t pay your closing balance in full by the due date, you will generally lose your interest-free period. This means you’ll pay interest on your outstanding balance from the time you made the purchase.
You may also pay interest on any cash advances or balance transfers. A cash advance typically attract interest from the date of the cash advance until it’s paid off.
Some cards offer 0% balance transfer offers, when you are charged no interest on your transferred balance for a limited time. But be aware that at the end of the offer period, the balance transfer rate will revert to a new rate, which could be higher than that of your existing credit card. If you haven’t paid off the amount transferred, you will be charged this rate on your outstanding balance.
2. Credit card fees and costs
You can be charged a range of credit card fees and other related costs. These could include annual fees, late payment fees, international transaction fees, cash advance fees and balance transfer fees.
There are some cards that have no annual fees, but these are usually no-frills cards. Airpoints and rewards credit cards typically charge higher annual fees.
3. Your credit score could be impacted
If you miss your credit card repayments, this can be recorded on your credit report and have a negative impact on your credit score. You’re considered to have missed a payment if you make the payment more than 14 days after the due date.
Making multiple applications for credit in a short space of time can also be bad for your credit score. This flags you as a greater risk compared to someone who makes infrequent applications.
On the flipside, if you use your credit card responsibly and make your repayments on time each month, this can help build up your credit history and improve your credit score.
Compare credit cards with Canstar
If you’re looking for a new credit card, then let Canstar be your guide. Perhaps you want one with a low interest rate, or low fees, or want to swap your rewards card from points to cash. Our free credit card comparison tool compares all the major cards in the market and awards the best our prestigious Star Ratings. For more information on credit cards and to compare further, just click on the big button below.
About the reviewer of this page
This report was reviewed by Canstar Content Producer, Caitlin Bingham. Caitlin is an experienced writer whose passion for creativity led her to study communication and journalism. She began her career freelancing as a content writer, before joining the Canstar team.