How do Credit Cards Work?

• 

  derpdeder on 09/04/2014 - 09:08

  +2

  This deal was popular because it was a rewards credit card for no annual fee. A rewards credit give you points for spending - every $10,000 you put on the card for example, you get $100 in vouchers.

  If you pay the balance of your card off each month you incur no interest. In addition, if there is no annual fee, you are effectively getting $100 for your regular spend. You do not get this with debit cards.

  • 

    bossmode on 09/04/2014 - 09:27

    By your post, essentially for someone in my situation (expenses accrued are only groceries/bills) would be that I'm incentivised to pay via credit (occur no excess fees if I pay back Citibank), whilst accruing points for their reward scheme… As opposed to what I'm doing now.

    Here's an image I've drafted up - does that sum up what Citibank's deal provides?

    Specifically referring to the Citibank deal, it states that it's 0% p.a. for 6 months on balances transferred.
    So in that instance would it mean that I only need to pay the balance of my card every 6 months?

    • 

      derpdeder on 09/04/2014 - 09:47

      +1

      Balance transfer is separate from your everyday spend. This is your outstanding balance with existing cards, transferred to a new card for their special rate. People do it because they are paying 20% on their existing debt when they could be paying 0% per this offer. The banks offer it because if someone has a debt they are paying 20% on, they are likely to get into debt again - the interest revenue then becomes their instead of a competing bank.

      If you buy groceries, you would have to pay the balance of your card monthly. Well, either pay the balance and incur no interest or the minimum payment and incur interest. Treat the concepts of balance transfer and everyday credit card spend separately.

      As RandomNinja points out below, there are other benefits that come with this card and others. These may provide incentives too but rewards schemes are the primary benefit of [some] credit cards over debit cards.

• 

  RandomNinja on 09/04/2014 - 09:08

  +1

  For people that are disciplined with credit cards, the fee free for life deal means its profitable to preference this card over cash.

  Rewards points can usually be redeemed for pre paid Visa cards or gift cards for supermarkets/petrol stations. My last calc had it at ~0.5% of your spend. Depending on how much you spend, it can add up to a few hundred bucks a year.

  Then there's the free travel insurance as you mentioned (very high excess), plus other services like the Concierge and Hotel Club membership. I used them recently to book a couple of restaurants and a hotel overseas and actually saved on the hotel compared to what I could have gotten from other online reservation sites.

  If you manage to get the Platinum card, you also get Priority Pass membership which is handy if you fly overseas. I used mine 2 weeks ago in LAX, saved $30!

  There are plenty of other benefits, the above are just what I value the most.

  • 

    bluedufflecoat on 09/04/2014 - 16:03

    +1

    Signature card gets Prioroty Pass, not Platinum.

    • 

      RandomNinja on 09/04/2014 - 23:19

      Ah, you are correct, got them mixed up. Shoulda checked my own card first!

  • 

    PLANT on 13/04/2014 - 08:52

    Hotel Club membership….which one?

    • 

      RandomNinja on 13/04/2014 - 20:32

      Hotelclub.com :) 15% off their rates when paying with eligible Visa cards

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  c64 on 09/04/2014 - 09:45

  +5

  if you don't know how credit card works then i think you should avoid them. they rely on people not paying off their monthly balance so they incur a huge interest payment it (10-20%). do not get a credit card just for collecting rewards. a balance transfer is not what the OP thinks it is https://en.wikipedia.org/wiki/Credit_card_balance_transfer .

• 

  Archi on 09/04/2014 - 09:50

  there are loads of credit cards with different features and benefits that suit individuals. some with annual fee and some with rewards and others do not. most credit cards come with a 55 interest free period… where you can make purchases on the credit card and they don't attract the usual 20% interest for 55 days,

  balance transfers are a feature where you transfer existing credit balances to another card to attract a 6 months interest free or lower interest rate, in your case you don't have a credit card so you have no credit to do a balance transfer.

  the citi bank is attractive because it's a credit card loaded with feature with things like a reward program for using the card, complimentary travel insurance, extended warranty on purchase on the credit card and so on… you'll have to read the PDS to get an entire view of the features.

  in your case and in mine. I use the credit card everywhere I can… groceries, online shopping, fuel, restaurants, bills to accumulate reward points and redeem them for good and services via their reward programs. I typically get between 350-500 dollars in gift cards per year to spend.

  my advice would be to get a low balance, annual fee free with credit card rewards.

  the Citibank platinum or Citibank signature are good credit cards to start you off.
  because it's fee free you don't lose out by not using the cards to it's full potential

• 

  Evil-Elmo on 09/04/2014 - 12:13

  At the simplest level, you are missing our on points, interest, and convenience:

  Points: If you put all your spending on the credit card, then the points start to add up. They can be used for a variety of things including gift cards and prepaid credit cards (effectively cash).

  Interest: By paying for goods immediately by debit, you're missing out on interest that that money could attract between when you make the purchase and when you have to pay your credit card bill (typically up to 55 days). While this may seem small, this can also add up.

  Convenience: I like the convenience of being able to read through all of my transactions in once place and then pay a single bill at the end of the month. It also makes tracking monthly spends easy. You also don't have to worry about having enough money in your transaction account. I keep my transaction account at a minimal level and keep the rest in accounts with better returns (e.g. mortgage or higher interest savings account). They are widely accepted and can be used overseas with ease. If ever needed you also have a possible credit source for emergencies (albeit at a poor interest rate - I did say emergencies!).

  There are other perks, such as free insurances etc. as others have outlined. With a fee free credit card paid off monthly you get all of this at no cost.

• 

  rewardscompared on 09/04/2014 - 12:28

  Credit cards can be really valuable if used wisely.

  For example, if you use your credit card for as many of your purchases as you can, you can get back around 1% of your purchases back in shopping vouchers (Myer, Kmart, Coles etc). 1% may not seem much but if you're putting $6k on your card each month, that's a $100 voucher every two months.

  Do the calculations here http://rewardscompared.com/cards and compare which card is best.

  And as other commentators have pointed out, be disciplined and pay it off in full (see http://rewardscompared.com/tips for more suggestions)

• 

  [Deactivated] on 10/04/2014 - 10:21

  In the car purchase scenario, your $20k could be earning interest for six months. At current average interest rates, say 3%, that's $300 - peanuts. But of course, the real game is that the Banks are betting that something will occur that prevents your from paying out the balance on time. You then typically you start to incur the Cash Advance interest rate of approx 21%. For comparision, 6 months of 21% is $2100.
  For the sake of building your personal Credit Rating, its better to stick with a card that you have set a low credit limit on it eg, $1000.

• 

  Cheshire Cat on 11/04/2014 - 00:24

  +1

  There's also the benefit that once you have a loan you can also have an offset account, leaving that money in your offset each month will save you a few hundred a year in interest as well…so further double dipping on your benefits.

• 

  ethereal88 on 13/04/2014 - 17:15

  -2

  Why bother? Everything on credit is 100% traceable back to you. You pay with cash, it isn't. Everything is stored and used to build up a profile on you. If you value your freedom, then its cash only, and only by necessity any online purchases with debit.