Credit cards provide a convenient way to make in-store and online purchases, both locally and internationally, using a flexible loan facility rather than your own money.

When you repay the closing balance (what you owe) in full each month, the loan will typically be interest free. If you repay over an extended period, you’ll generally be charged interest until the balance is repaid in full.

In addition to offering a convenient way to pay, credit cards often feature a rewards program, complimentary travel insurance, and various other benefits, making them an appealing option, depending on your needs.

Rewards programs are largely funded by merchants who pay a fee each time they accept a credit card payment. With higher merchant fees than Visa and Mastercard, American Express offers richer reward programs, however this comes at the expense of card acceptance and surcharging.

Today, most credit cards include both a physical card for your purse or wallet, and a digital card for your mobile device (e.g. Apple Pay, Google Pay).

Depending on the credit card you choose it will offer some, or all, of the following benefits:

1. Faster and more convenient than paying with cash;
2. Managing cash flow month to month, and the ability to pay for larger purchases over a period of time;
3. Ability to shop online, and overseas without physical currency;
4. Earning rewards on your spend, such as frequent flyer points or cash back;
5. Complimentary insurances, such as overseas travel insurance;
6. Complimentary access to airport lounges; and
7. Ability to pay using your mobile phone (e.g. Apple Pay, Google Pay).

Credit cards offer many benefits, however there can be some downsides:

1. Cost of interest, if you don’t pay off outstanding balances, particularly if the interest rate is high;
2. Risk of accumulating debt if you don’t manage spending and repayments carefully;
3. Unexpected fees, such as international transaction fees, late payment fees, Balance Transfer fees, and cash advance fees; and
4. Impact on credit score if you don’t use the product in a way deemed ‘responsible’ by banks or lenders.

There are four main types of credit cards offered in Australia. No Annual Fee Credit Cards provide a low cost, no-frills option. Low Rate Credit Cards focus on providing a low interest rate. Rewards Credit Cards allow you to earn and redeem points for a range of rewards, such as gift cards or travel. And Frequent Flyer Credit Cards allow you to earn points in a specific airline frequent flyer program, such as Qantas or Velocity.

While it’s almost impossible to find two credit cards identical in all aspects of price and features, credit cards that share the same ‘tier’ tend to have many similarities.

Classic, Gold, Platinum, and Black (or Signature), are the four main credit card tiers. As a general rule, Classic credit cards are no-frills products with a low annual fee, while Gold, Platinum and Black credit cards offer increasingly richer features for a higher annual fee. Higher tier credit cards also have higher minimum credit limits, meaning you’ll need a higher income to be approved.

Low Fee and Low Rate products tend to be Classic credit cards, however there’s a small number of Gold and Platinum options on the market that offer additional benefits, such as complimentary travel insurance.

Rewards and Frequent Flyer credit cards are offered in a range of tiers, with the higher tiered options featuring more generous points earn rates, and benefits such as complimentary travel insurance, and airport lounge passes.

With over 200 credit cards to choose from in the Australian market, there’s no one size fits all. When considering your many options, you should first think about how a product best suits your needs. For example, there is no point taking out a credit card that costs $300 per year in annual fees so that you can earn rewards points, if you are not going to earn enough points to cover the cost. Similarly, if you’re planning on travelling and never pay interest, there are various travel and rewards credit cards that may benefit you more than the no-frills options.

One of the most important considerations when choosing a credit card is whether or not you’ll repay the balance in full every month. If you plan to use your credit card to smooth your cash flow and occasionally help finance purchases, then a Low Rate Credit Card should be on your short list.

In short, consider how you will use the card, what you’re prepared to pay for it, and how well you know your spending habits and needs, both now and in the future.

A simple information source for how to improve your credit score can be found on the Government Money Smart website. Maintaining a good credit score is important if you wish to borrow over time, for example, taking out a Home Loan.