There are many different credit card options out there — but how do you know which card (or cards) to use?
Debit or credit. Or Eftpos.
First off, let's explain just what these cards do.
Credit cards allow you to pay for things with a certain amount of borrowed credit that you don't yet have. Lenders and companies love credit cards because they allow people to buy things essentially anywhere, online or in-store, without needing any money upfront.
Like loans, credit cards are issued on your ability to pay back on borrowed amounts. This is also why credit limits are set, to make sure those who are borrowing credit aren't taking on more debt than they can handle.
Who decides how much debt I can handle?
Your credit limit is decided partly between you and your provider and based on your credit history. When you first take out a card, you'll need to look into how much you want to be able to borrow and what you'll spend on the card. This is decided per month, with the credit limit being the amount you're allowed out for that time.
Credit lenders don't just agree to any number. They'll look at your repayment history, credit score and other information around your current financial situation. The number they arrive at is a risk assessment of how much they're willing to trust you. Most providers will have their minimum and maximum amounts, depending on what they're like as a borrower.
A couple of things to note.
Credit card histories are closely monitored by reporting agencies — which means bad or non-payments can drop your credit score. So can overextending on the number of cards you use or maxing out on loan amounts.
You should also keep in mind that interest will be charged on your card if you don't repay the full amount owing within a month. The amount of interest you'll repay depends on the type of credit card you take out (and the size of your credit limit). Paying with a credit card usually means incurring some interest, so you may want to think about paying in cash or with another debit/Eftpos card. Further fees and interest may be added if you can't pay in full and need to set up a repayment plan with your provider or if you're late on repayments.
Some cards will have an interest free period to entice people to take them out. Take full advantage of that if you can, but be aware of what follows.
Contactless payment is something you can do for payments under $200 — over that, you should be securing your payments with a pin code (which you set up on the card).
Last thing to note — if you're making a payment online, do it on a secure network. Public wifi is potentially risky, as your payment details can be easily traced. If you're curious, we've got another blog all about ways to stay safe online.
So debit or Eftpos?
We've spent a lot of time in this blog talking just about credit cards, but that's because a lot of the same rules apply. An Eftpos or debit card, like credit, is a bit of plastic that you can use to buy stuff at the store and is protected by a pin code.
The difference is that debit and Eftpos cards rely solely on the money you already have in the bank.
This means that you're not borrowing money with either of these cards, unlike with a credit card. Debit or Eftpos cards are usually set up with a bank and don't acquire much in fees or interest. Payments with these cards also don't reflect your credit history unless you start missing payments.
So what should I do?
Taking out a credit card may be a great way to build your credit history, with easy approval of cash that you pay back each month. But it will include more fees, and it can get messy if you're unable to pay it back. We also suggest you stick to a low credit utilisation (more on that in another blog).
On the other hand, debit cards are suitable for every day out and about purchases. They're an excellent way to avoid adding to your credit bill if you're buying everyday things. We recommend using a debit card for most regular payments. That's because, unless you're seriously hard up, there's no reason to get absolutely everything on loan.
Credit cards do have one other advantage, though — they're more secure for online payments. So if you're buying stuff on Amazon, you may want to use a credit card. You can also set up direct bank payments if you've got available funds and want to avoid taking out a card.
We hope this covers everything you need to know about debit or credit. The difference is that credit lets you borrow the money you don't yet have, while debit lets you access money already in your account.
We recommend debit for everyday uses if you can. But, if you're good at repayments anyway, that shouldn't stop you from taking out a credit card to help grow your score and cover big-ticket items.