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Credit card or debit card?

by Ben Power | 19 Nov 2012


Credit card or debit card? Low-interest or rewards card? We give you the facts so you can figure it out. 

From the mid-1980s to the mid-2000s credit card usage surged. People took advantage of the availability of credit and spent more than they earned.

Since the global financial crisis (GFC) this has reversed, with credit card use declining as Australians became more financially conservative.

But credit cards are still a major part of people’s financial lives, and despite recent belt-tightening, many are still not using credit cards properly and are finding themselves struggling with debt.

Self-funded retirees particularly need to take extra care in using credit cards so that their retirement wealth isn’t gradually eroded by debt.

Credit cards can offer more purchasing power and access to online markets, and they can also be convenient options for travelling due to their wide acceptance. It is important though to choose the right card for your needs and be disciplined in its use.

“If you are retired, you’re not going to be earning any more money, and you’re going to be living off your investments. Retirees should make sure they track their cash flows properly,” said Neil Salkow, an independent financial planner from Roskow Independent Advisory.

“A lot of people can get caught up in the credit card cycle and keep spending and spending and getting more into debt.”

Choosing a credit card

Choosing a card can be confusing. There are 270 different cards from 67 different brands available in Australia, including cards with reward programs, low interest, interest-free periods, no annual fee, and special deals for transferring balances from other banks’ credit cards.

“There are a lot of different styles out there,” said Peter Arnold, a financial analyst for credit ratings agency Canstar Cannex. “So there is a credit card to suit most needs, as long as the user can make repayments on their debt.” 

Choosing a credit card that maximises the potential advantages, such as greater purchasing power and convenience, requires more than just picking the most popular card. You need to tailor your choice to your needs.

“Simply identify how you will use the card,” Arnold says. “For example, will you be able to pay off your debt every time and on time? If so, you don’t have to be as concerned with the interest rate, instead look at the annual fee on the card as this can be quite high sometimes.”

Arnold said to make sure you are not paying unnecessary annual fees. “There are lots of cards out there that don’t have annual fees now,” he said.

“BankWest is a good example. If you’re using it for heavy spending, get a rewards card. These can offer you travel options and cash back.”

Choosing a debit card

The recent shift away from credit cards has seen more people take up alternatives that offer the flexibility of credit cards with the ability to use their own money.

Reserve Bank of Australia figures show credit cards were used 131 million times in July 2011, but debit card usage surged up 18.9 per cent to 204 million times.

This change from credit to debit reflects growing conservatism after the GFC, according to the Reserve Bank of Australia. “People are getting smarter on how to manage their money,” Salkow says.

If you are in control of your spending, credit cards are convenient, however you need to keep track of your finances to get good use out of them.

The message is that although you may find a card suited to your needs, the potential to overspend is always there, a sentiment echoed by Arnold. “The main downside with credit cards is their potential to make spending easy,” he said. “There is a huge number of people struggling with credit card debt at the moment. People can fall into the trap of only dealing with the minimum repayments on their outstanding debt, which is often as low as two per cent. Human mentality can make people think ‘I’ll pay it back later’, and rack up huge amounts of debt. You have to be very disciplined in your use of credit cards.”