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Credit card…friend, foe or somewhere in between?

Did you ever hear the line “you need a credit card to build good credit”? It’s a common American belief that isn’t all that relevant here in Australia.


So if you don’t need a credit card – should you get one? It can certainly be appealing with rewards points; cashback deals and free insurance on offer to entice you to sign up. So, what are some of the drawbacks? 

We break it down for you. We've also got a handy video below from Director and Financial Adviser Josh Lee, with his take on whether you should get a credit card.

1. Sky high interest rates

Credit cards come with some of the highest interest rates around. While many have interest free days, if you’re not paying off your card monthly (more on this below) and letting your balance build – you’ll potentially be paying a huge amount of interest. The average credit card interest rate sits at around 19.82%, according to data from the Reserve Bank of Australia.


Different interest rates can also be applicable to each card, depending on how you’re using it. For example, you can be charged more for cash advances compared to purchases or you may have an interest free introductory period for balance transfers.


Regardless, the rates across all cards are generally quite high – so if you are going to use a card, set limits and make sure you pay it off as soon as you use it or regularly within the interest free period if you have one.

2. You could spend more by using a credit card

There are a few studies that show the impacts of using a credit card on your spending. In a 2001 study, it was found shoppers spend up to 100% more when using their credit card to pay instead of cash.


It makes sense! If you go to a shop with $100 in cash, you’ll be careful not to pick anything over that amount as you won’t be able to pay for it. However, if you take a credit card and you see something that costs $150 that you really like – it’s easier to justify overspending.


Other studies have found when you pay with cash, you immediately feel the pain of parting with that money. Whereas with a credit card, there’s a delay between the point of purchase and when you pay it off and actually part with the money.


If you overspend and let your balance accumulate, that’s where a high interest rate can really start to hurt. This is demonstrated with the Money Smart credit card calculator. If you owed $1,000 on a card with an 18% rate and you only paid the minimum repayment, it would take you 7 years and 10 months to pay it off and you would have paid $1,862 in total.

3. It could impact your borrowing capacity

If you plan to buy a home in future, you’ll need to consider the impact a credit card will have on your borrowing capacity.


Even if you just have a credit card for the ‘in case’ and you’re carrying a $0 balance, lenders will consider your entire credit limit, not just your balance.


It makes sense, lenders need to plan for the worst case scenario. They want to make sure if you do spend your entire credit limit you can repay it, while also making your mortgage repayments.

How to use credit cards responsibly

You can set limits around what you use them for and make sure you’re paying them off within the interest free period every month. 


If you know you’re at risk of overspending don’t get sucked in by enticing offers of frequent flyer points. If you get a credit card, overspend and end up in a debt spiral, those free travel benefits won’t be worth it. 


The best thing you can do is understand yourself and implement a cash flow system to support you to maintain your lifestyle and achieve your goals. We can help with that – book in with a member of our team for a free 15-minute chat.



General advice disclaimer: The information contained within this post is general in nature and does not take into account your personal circumstances. Please reach out if you wish to discuss your personal situation.

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We formed Link Wealth Group because we noticed so many financial advice practices overcomplicate the financial planning and mortgage process. It doesn’t have to be difficult! We know we can provide top-notch easy-to-follow wealth advice to Australians in a way that also empowers you to be in control of your finances and your path to financial freedom.

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