“Never ever pay the minimum payments – it’s like Chinese water torture. It barely covers interest”

“Just like a mortgage, credit card choice depends on the consumer’s behaviour and their needs”

A $10,000 debt could turn into a 27-year loan with approximately $11,000 in interest

“You should try to have a credit limit of no more than two times your net monthly salary”

These days it seems that credit cards are omnipresent in our society. The humble credit card has come of age and has been embraced by Australians, and consumers are now spoilt for choice.

Credit cards are available from all types of lenders, from mortgage providers to retailers. In fact, they’re well on their way to becoming fashion statements – witness the Virgin ‘rounded edge’ card or National Australia Bank’s fashion-friendly Visa Mini Card – and it’s becoming increasingly easy to obtain them.

And once you’ve made your choice it’s likely you’ll be bombarded with tempting offers to increase your credit limit. So how do you choose wisely and more importantly, how do you keep your credit card debt under control?

Pick a card, any card…

Is picking a credit card really as random as selecting a card in a game of blackjack? Not if you do your research and know your needs.

Basically there are two types of card – those with interest free days and those with no interest-free days. ‘Interest free days’ cards tend to have a higher interest rate, charged from the day you purchase your goods or services or from the statement date unless the whole amount is paid in full within the interest free-period. Interest on cash advances is applied immediately and there are generally higher annual fees (up to $150) for these cards. They will also include any number of rewards and benefits – just make sure these rewards and the interest saved are worth the fees charged. These cards are ideal for those people who are disciplined enough to pay off the balance in full each month and can avoid cash advances.

“Just like a mortgage, credit card choice depends on the consumer’s behaviour and their needs,” says Denis Orrock, general manager of InfoChoice. “If for example, you pay off the balance every month and you don’t have an outstanding balance from month to month, then the interest rate is probably not that important to you. You should be looking at minimising any payments associated with the card, the quality of the awards program and also the number of interest-free days.”

Conversely, ‘no interest-free days’ cards have a lower interest rate charged from the date of purchase and generally have lower fees. They also usually come without add-on benefits like reward programs. Orrock says these cards are ideal for those who do not pay off the balance from month to month.

“If you’re paying interest and you have an outstanding balance from month to month – which is the vast majority of us – you should be looking at a card with a low interest rate,” he says. “Interest-free days are completely irrelevant to you because you don’t get any. You should also look for the lowest fees.”

There is a third card type – the debit card – that can be included here, although strictly speaking it’s not a credit card at all. Debit cards are linked to your bank account so you are using your own funds – a safe and economical alternative to credit. Some cards also have a small overdraft facility and can act as both a debit and credit card.

Playing the game

Whichever card you choose, you’ll need to be careful not to let the temptations of credit take over your life. Australians hold over 10 million cards between them and the average outstanding debt is $2070. Some commonsense rules should be followed.

When considering the right card for you, think about what you will use it for. If it’s to be used solely for irregular purchases of things like petrol, dining out or occasional small purchases and you don’t want the added benefits such as reward programs, it’s probably not worth paying extra. Cards with rewards programs generally have higher interest rates and fees, and are more suitable for those who pay off their balance within the interest-free period and who use their card a lot. If you carry over a significant balance on your account from one month to the next you will probably lose more in interest charges than you would gain from any rewards earned. Therefore, a no fee, low interest, no free days card might be a better option.

On the flipside, if you want the benefits of a higher interest card with a fee, and you intend to pay off the balance by the due date, choose the card that has the lowest annual fees or the benefits that best suit your lifestyle. Benefits can include frequent flyer and loyalty programs, discounts on mortgage fees, travel or purchases insurance.

“It really boils down to what you want from your rewards program,” says Cannex analyst Garfield Wright. “If you’re after flights, which typically require more points to redeem, then obviously you need to spend more to get that type of reward.”

Rewards programs are now quite elaborate, above and beyond frequent flyer points. “I think they [rewards programs] are becoming increasingly competitive, because they are a point of differentiation,” Wright says. He adds that consumers are now more aware of what’s on offer and are asking tougher questions: “If I sign up for that card, what can it give me?”

The house takes its cut

You will also need to be aware of fees, which can add significantly to the cost of your card. Be careful of how you use the card and make sure all fees and charges are disclosed by your lender. Common fees can include:

-Annual account fees

-Rewards program fees

-Late payment fees

-Payment dishonour fees

-Charges for exceeding your credit limit

Raising the stakes

Tempting low rate and zero interest cards have only just arrived on the market, issued by competitive lenders eager to sign you up. You may be considering transferring your balance to one of these card types.

As always, there are things to be wary of. “Balance transfers can give people that breathing space to make a dent in their balance, but the trap is you don’t get rid of the old card,” Orrock warns.

Usually the zero or low rate is offered for the first six months and then it reverts back to a standard rate, so while you may get some short-term debt relief, make sure the rate applied after the ‘honeymoon period’ is reasonable.

In some cases the incentive rate only applies to the balance transfer and you may pay a higher rate on additional purchases that are put on the new card. This is known as the purchase rate. Again, it’s important to be aware of what interest rate is being charged. Also check for how long the balance transfer receives the low rate – is it for a limited period or does it last for the life of the balance?

Play it safe

Remember, when it comes to credit cards, the house does not always have to win. With smart choices you can select a card that will match your needs. So while it’s tempting to take advantage of every offer to raise your credit limit, Orrock offers these final words of advice: “You should try to have a credit limit of no more than two times your net monthly salary. If you keep getting those increase credit offers, bin them.”