Smart ways to use credit cards

Here’s what you need to know to get the most from your credit card

Most of us enjoy the convenience and benefits of credit cards from time to time. Provided we have good financial habits and use cards wisely, they can be a handy way to manage cash flow.

However, the potential for hard-to-manage credit card debt can be an issue for those with less than responsible financial habits. Here’s what you need to know to get the most from your credit card.

Understanding credit cards

A credit card represents a contract between the cardholder and the financial institution. The cardholder may use the institution’s funds to pay a merchant or withdraw cash, based on the assumption that the cardholder will repay the lender a minimum amount by a set time.

For this convenience, the institution generally charges interest on the funds used, unless the borrowed amount is paid in full by a certain date.

Credit cards work on a revolving account system, which means the cardholder can borrow any amount up to his or her limit and does not need to repay the full amount each period, and can have interest-free periods depending on the terms and conditions of the card.

The key figures to look for on any credit offer are:

• annual fees
  How much should you pay to use this credit card? If you plan to use credit only in emergencies, consider a card with a low annual fee so you don’t have to pay too much for funds on standby. However, it is worth considering that cardholders often find great value with credit cards that offer rewards programs and insurances. The collective value of these card features may exceed the cost of the annual fee.

• interest rate
  What is the cost of these funds? If you don’t pay off your borrowings every month, it pays to be aware of how much you’ll be charged in interest.

• payment terms
  How long do you have before you need to make a repayment? Does the card offer interest-free periods for cardholders who have paid off their balances in full? To help you manage your cash flow, credit cards can provide you with various payment terms.

• credit limit
  How much will the lender let you borrow at once? A lender will determine your maximum credit limit based on various factors including your income and living expenses.

Developing good credit habits

Credit cards not only offer the benefit of convenience, they can also be a useful way to manage your money and accrue rewards when used responsibly. To maximise the benefits and avoid paying more than you need to:

• establish a balanced budget that gives you a clear understanding of your incomings and outgoings every month. Use a budget planner to help with your planning, stick to the budget and don’t overspend. Be cautious not to spend more than you can afford to repay

• make sure you pay off your credit card balance in full every month, within the interest-free period. Set up an automatic transfer to pay off the amount owing on your credit card each month. This will avoid any extra charges and prevent you from falling behind on repayments and getting into debt

• use your credit card as an effective way to manage your cash flow. For example, if you need to pay a bill during the month but won’t have the funds until after the bill is due, pay it within the due date using your credit card. Then pay off your card balance as usual at the end of the month. By making both payments within the due dates, you’ll be in a better position to develop a good credit history

• you can use your credit card to pay for everyday purchases each month. Many retailers, such as supermarkets, don’t charge extra if you use credit cards. Putting your everyday expenses on credit will allow you to keep cash in your savings account for longer, maximising your potential to earn extra interest

• recognise that cash withdrawals attract additional fees and may have higher interest rates than purchases, even if you settle your account on time. There is no interest free period for cash withdrawals.

Managing debt responsibly

If you already have credit card debt, there are a number of things you can do to manage it more responsibly:

• plan your purchases and determine your priorities. Use credit cards only when necessary and continue to make repayments

• set-up automatic payments to occur right after pay day, so you can pay down outstanding debt at the time when you have a higher balance available in your account

• if you have more than one credit card, consider how you can maximise the impact of your repayments. This may be to pay off the card with the higher interest rate or larger balance

• consider consolidating your debt with a balance transfer offer. Be aware that you may be subject to higher interest rates after the balance transfer period is over.

Credit cards offer an excellent option to help manage your cash flow, and many come with many additional benefits like reward programs, travel insurance, and theft and fraud protection.

Macquarie offers a range of credit card options, designed to suit all types of card clients. For those looking to consolidate balances and save on interest, the Macquarie RateSaver Card can be a good choice. If you are seeking to be rewarded for everyday spending and prefer the privileges of travel insurance and concierge benefits, a rewards card such as the Macquarie Black Card or the Macquarie Platinum Card is a very attractive option.

Credit cards can be valuable tools for managing spending. Use them responsibly and you can enjoy their rewards, convenience and financial flexibility to your advantage.