Credit cards offer many advantages. There is the convenience of being able to buy needed items now and the security of not having to carry cash. You also receive fraud protection and in some cases rewards for making purchases.
With these advantages also come responsibilities. You need to manage credit cards wisely by understanding all of the card's terms and conditions; stay on top of payments; and understand the true cost of purchases made with credit. Using a credit card is like taking out a loan. If you don't pay your card balance in full each month, you'll pay interest on that loan.
The best way to maximise the benefits of credit cards is to understand your financial lifestyle - your money needs and wants. Once you determine how you'll use a credit card, it's important to understand all of the card's features including:
- Annual interest rates and whether rates are fixed or variable
- Annual and late fees, as well as fees if you go over your credit limit
- Credit limit on account
- Rewards points
Some credit card issuers offer free, personalised and automatic alert messages to your phone and email to help you keep track of:
- Available credit
- Payment due dates
- Payment histories
- Purchase activity
Understand Your Rights
Credit cardholders are entitled to protections:
- Zero liability means you are not responsible for fraudulent activity on your card when you report it promptly.
- In some cases, you have the right to dispute purchases with merchants for unsatisfactory products or services.
Follow the 20-10 Rule
This general "rule of thumb" helps you understand how much credit you can afford. Credit cards are loans, so avoid borrowing more than 20 per cent of your annual net income on all of your loans (not including a mortgage). And payments on those loans shouldn't exceed 10 per cent of your monthly net income.