credit cards – Tippla Credit School

April 27, 2021September 7, 2021

What’s The Difference Between Credit Cards And Personal Loans?

If you are looking for extra finance, whether it’s to make a big purchase, cover unexpected expenses, or build a credit history, there are two main options available for you – a credit card or personal loan. These two types of credit are very popular in Australia, but we’re here to break down the difference between credit cards and personal loans, so you can choose what’s best for you.

What is a credit card?

Before we jump into the difference between credit cards and personal loans, let’s start with the basics – what is a credit card? Literally speaking, a credit card is a piece of plastic or metal that is issued by a bank or financial services company.

You can use a credit card to pay for goods and services, as well as any personal expenses that may arise. A credit card is a line of credit that you can use to pay for personal or business expenses on the promise that you repay the money back, often with interest. Your credit card is a revolving line of credit, which means it refreshes after a certain period of time – typically each month, and it will continue to do so up until you cancel the card.

Because a credit card is a line of credit, this means you don’t need to have the money physically in your bank account, as is the case with a debit card. This is where credit cards and personal loans are similar.

Different types of credit cards

In Australia, there are many different types of credit cards. Whilst the basics stay the same, the different types of credit cards all come with their unique purposes and benefits. Here’s a quick overview of the different options available to you.

Low-interest credit cards	As the name suggests, a low-interest credit card is a credit card that offers a lower interest rate than normal. Many credit cards charge 20% or more on purchases, whereas low interest-rate credit cards generally have an interest rate that’s 14% or lower. These cards can also come with no interest periods, typically up to 55 days. However, low-interest credit cards can generally come with more restrictions, fewer rewards and a higher annual fee.
Balance transfer credit cards	A balance transfer credit card is when you transfer your outstanding debt from one credit card to your balance transfer credit card. The balance transfer credit card usually has a low interest rate or sometimes even a 0% interest rate for a limited time. This allows you to repay your existing debt, and try and repay your new debt with the balance transfer credit card within the interest-free or low-interest period, which can save you money. However, if you can’t repay it within this period, then it might cost you more in the long run.
No annual fee credit card	Most credit cards come with an annual fee that you have to pay each year across the life of your credit card. A no annual fee credit card is a type of credit card where you don’t have to pay this fee. There are two main types of no annual fee credit cards – the first is where you don’t have to pay an annual fee during the whole life of the credit card, the second is where you don’t have to pay an annual fee during an introductory period, which usually lasts for 1 or 2 years. To offset the lack of an annual fee, these types of credit cards usually come with higher interest rates, which could actually cost you more in the end.
Rewards credit card	Rewards credit cards give you some kind of reward, usually in the form of points, every time you make a purchase. There are many different types of rewards cards, and the points can be used for things like – retail rewards, supermarket rewards, cashback deals, frequent flyer points and petrol rewards. Whilst these cards can give you bonuses, they don’t come for free. Generally speaking, rewards cards often come with higher annual fees and it can take a while for the points to build up (and they can expire). So, it’s important to read the terms and conditions carefully and weigh up the pros and cons.
Cashback credit card	With cashback credit cards, you can get cashback when you make purchases. This can come in the form of a cash voucher or money credited back to your account. However, as with all types of credit cards – when there are perks, that generally means higher fees. In this instance, cashback credit cards often come with higher interest rates and an annual fee. Some cards can also cap how many cashback points you can earn.
Frequent flyer credit card	A frequent flyer credit card is a common type of rewards credit card, and it’s great for those who love to travel. When you spend on your frequent flyer credit card, you’ll accrue points. When you build up enough points you can put them towards flights and either get cheaper flights or have the whole cost covered by points – depending on how many you have. The downsides to this type of credit card are that the frequent flyer points can expire. These types of credit cards also generally come with standard credit cards fees such as – annual fee, program fee, cash advance fee and more.
Platinum or black credit card	Platinum or black credit cards are high-end credit cards. You can get a number of benefits with these cards – exclusive dining and travel deals, as well as rewards points that don’t expire. If you’re over 18 and earn more than $50,000 each year, have a good credit score, then you can apply for one of these credit cards. Some of the drawbacks of a platinum credit card include much higher annual fees and interest rates.

What is a personal loan?

Similar to a credit card, a personal loan is a line of credit that allows you to pay for personal expenses – whatever they may be. A personal loan allows you to borrow a specific amount of money under the agreement that you pay it back within a predetermined time period, referred to as the loan term, with interest.

The interest rate you are charged will depend on a couple of factors, including your credit score. Want to see where you’re at? Check your credit score with Tippla here.

When taking on a personal loan, you can get a loan with a fixed or variable interest rate. You can also choose between a secured or unsecured personal loan.

Different types of personal loans

There are a couple of different types of personal loans. Here is a breakdown below.

Secured and unsecured personal loans

The two main types of personal loans are secured and unsecured personal loans. A secured personal loan is when you take on a personal loan that is guaranteed by an asset such as a car. This asset is used as security against you defaulting on your loan. If you default on your repayments and can’t afford to repay the loan, then you are at risk of losing your asset.

Secured personal loans are generally used to purchase the security you’re using against the loan. Let’s break that down. Say you want a loan to buy a car, then the car you buy will be the security on the loan.

One of the benefits of a secured loan is that you can generally get lower interest rates. Interest rates are set to protect the lender against the risk of you defaulting on your loan. Because your asset serves as collateral, the lender can afford to offer you lower interest rates, because they have already hedged against the risk of you defaulting on your loan.

Unsecured personal loans, on the other hand, is a personal loan that you don’t have to provide any security for. Reasons for taking out an unsecured personal loan range from holiday expenses, home improvements, unexpected expenses, medical bills and more.

Because there’s no security against the loan, the interest rates are generally higher for unsecured loans. But on the plus sign, the application and approval process is usually quicker.

Fixed or variable interest rate personal loans

When it comes to interest rates on personal loans, the most common are either fixed-rate or variable-rate loans. Here’s what that means. A fixed-rate personal loan is when the interest stays the same for the whole loan term.

One of the perks of this is it allows you to easily budget for your repayments, as they stay the same each month. However, a downside of this is you could miss out on your interest rate being reduced if interest rates go down. On the flip side, if interest rates go up, then you’re protected with a fixed-rate personal loan.

Variable-rate personal loans are when the interest you’re charged each month isn’t the same, and it can fluctuate depending on the market. Some of the pros of this type of loan include – fewer repayments because you can make earlier repayments and pay off your loan sooner, more flexibility and potentially lower interest rates.

Although there are some positives to choosing this type of loan, there are still some things to consider. Namely, you might end up having to pay more in interest if the interest rate rises. This can cost you in the long run.

What’s the difference between credit cards and personal loans?

Whilst there are many similarities between a credit card and a personal loan, there are also some differences. So what is the difference between credit cards and personal loans? Here are the main points:

Borrowing amount

When you are approved for a personal loan, you will be given a set amount of money in a lump sum at the beginning of the loan term. You can’t spend more than the amount you have been given unless you take out an additional loan. With a credit card, the borrowing limit refreshes each month, so your borrowing limit is more flexible than a personal loan.

Length of term

Personal loans generally come with a fixed term, whether it be a couple of months or years, and they come with a termination date. Credit cards, on the other hand, are a revolving line of credit and refresh each month. For most credit cards, you can have them for as long as you want – whether that’s a month, years, or even decades. The length of time is determined by you as the customer.

Interest rates

Personal loans generally have lower interest rates than credit cards. According to the Reserve Bank of Australia (RBA), the average variable interest rate for a personal loan as of September 2020 was 14.41% and 12.42% for a fixed personal loan. Whereas the average credit card interest rate ranges from 16-18%, according to numerous comparison sites. However, you can avoid paying interest on your credit card if you pay off the card balance in full each month.

Rewards

Although credit cards might have higher interest rates, they generally come with more rewards and perks. As we covered above, sometimes you might end up paying more for these perks, but if you use them wisely, you can make them work for you.

What’s the right decision for me?

Now you know the difference between credit cards and personal loans, you might now be thinking about what’s the best choice for you. At the end of the day, only you know your financial situation. However, there are a couple of things you can consider when choosing between a credit card or a personal loan.

Firstly, if you have control over your spending and can follow a budget, then a credit card might meet your needs. Whereas if you’re looking to make a big one-off purchase or pay for an expense, a personal loan might be better for you.

If you’re unsure, you can speak to a free financial counsellor who can help you make the best decision for your personal situation.

February 8, 2021September 7, 2021

How to Use Credit Cards Effectively: A Guide

Millions of Australians have some kind of credit card. But there’s a difference between having a credit card and utilising a credit card. To help with this, Tipple has put together a helpful guide on how to use credit cards effectively.

As of November 2020, there were 13,668,490 credit cards in circulation, according to comparison site Finder. These credit cards netted a national debt accruing interest of $20.9 billion. At the same time, the number of debit cards in circulation was more than double, at 34,861,747.

With this in mind, it’s clear that a lot of Aussies are using credit cards to help with their finances. So let’s dive into the ins and outs of credit cards.

What is a credit card?

When you take on a credit card, you are getting a line of credit that you can use to make purchases, balance transfers and cash advantages. Where a debit card limits you to the money you have in your bank account, credit cards are like a loan. This is because they provide you with extra finance which is set at a predetermined amount.

Like a loan, you have to pay back your credit card. At the very least, you will need to make the minimum repayment every month by the due date of the balance.

As highlighted by Investopedia: “Credit cards impose the condition that cardholders pay back the borrowed money, plus any applicable interest, as well as any additional agreed-upon charges, either in full by the billing date or over time.”

Who offers credit cards?

In Australia, there are a lot of options when it comes to credit cards. In fact, there are hundreds of options available. Nowadays, banks don’t offer one type of credit card. They often offer multiple different types of cards all serving different purposes. You can get access to low-interest credit cards, no annual fee credit cards, balance transfer credit cards, and rewards credit cards.

Rewards cards can vary. A common one is credit cards tied to the frequent flyer points of main airlines such as Virgin and QANTAS.

The benefits of credit cards

With anything in life, there are both pros and cons to having a credit card. Let’s start first with the benefits of credit cards.

Access to extra finance

One of the main reasons people get a credit card is because they want access to a line of credit. A credit card allows you to spend money you might not have in your bank account at that very moment. It gives you the freedom to buy what you want and need without restricting you to your bank account.

This extra line of credit can become especially useful in emergency situations. You can deal with the problem right away and not have to wait until payday. It is very important to highlight that a credit card isn’t free money. You have to pay back everything you spend. So it’s good to be careful that you don’t fall into the trap of overspending and putting yourself into further debt.

Build up your credit score

One benefit of having a credit card is that you could use it to create a good credit history and boost your score. If you make your monthly repayments on time and don’t max out your credit card, then it could boost your credit score.

Rewards

A lot of credit cards have some kind of rewards programs where you can earn bonuses. This can range from frequent flyer points, bonuses tailored to specific stores, cashback and extras such as travel insurance.

Security

Another benefit credit cards can offer is the added security when shopping online. As we recently highlighted, online financial fraud and credit card fraud in Australia is a real threat. This is when scammers will somehow access your card details and use them to shop online.

If you use your credit card to shop online, if scammers do get access to your credit card details, then it’s not connected to the money in your bank account. However, if fraudsters get your debit card details, then they will be draining your personal money.

If you are a victim of credit card fraud, you will most likely not be liable for the money stolen. Generally, once you alert your bank or financial institution about the fraudulent transaction(s), they will freeze your card and reimburse you the funds.

However, there are some situations where you could be liable for the lost funds. For example, if you display your pin obviously on your credit card for all to see, or you took too long to notify the bank, then you might be liable for the fraudulent charges.

In Australia, most credit cards now come with a chip on them, in addition to the magnetic strip. The encryption of chip cards helps to prevent fraudsters from stealing your card information during point-of-sale transactions.

The downside of credit cards

Whilst there can be numerous benefits to having a credit card, there are also a few things to watch out for. Whilst credit cards give you access to extra cash, you do have to pay that money back.

Fees and interest

When you take on a credit card, depending on which one you select, you might have to pay credit card fees and interest. This means, when you spend money on your credit card, you might end up having to pay back more than you anticipated.

When you apply for a credit card, you should read the conditions of the card carefully and make sure you can afford the repayments. It’s also important to be aware of what actions trigger fees and interests on your repayment.

Minimum repayments

Most credit cards have a minimum monthly repayment. This is the lowest amount you have to pay in order to meet your credit agreement. The minimum monthly repayment is usually about 2 or 3% of the total amount you owe for the month.

This means that you don’t actually have to pay your whole bill when you have a credit card, you only have to pay the minimum repayment by the due date to avoid paying late fees. However, you will still accrue interest on the remaining amount owing, which could cost you more in the long run.

Here’s an example of how the minimum monthly repayment works. Say your credit card charges you 10% interest per year and you spend $1,000 on your credit card in one month. If your minimum repayment is 2%, then you would have to pay at least $20 by the due date to avoid late fees. However, the remaining $980 that you haven’t paid will be charged the interest rate, which will cost you an extra $98.

This $98 in interest will be added to your outstanding balance for the next amount. Then you’ll have to pay interest on the new amount. Taking into account that you’ll probably spend more in the next month, you can see how your credit card debt can quickly get out of hand!

Maxing out your card

Maxing out your credit card is when you reach your credit card limit. Say your credit card limit is $8,000, then maxing out your credit card would be when you spend all of that $8,000 in one month.

When you max out your credit card, you can’t make any more purchases until you make a repayment. Depending on your card conditions, you might incur fees and charges when you max out your card, which means you’ll have to pay even more back.

When you max out your credit card, it means you have a lot more to repay. Even the minimum repayment amount is higher. 2% of $1,000 ($20) is a lot less than 2% of $8,000 ($160). And 10% interest on $980 ($98) is a lot less than 10% on $7,840 ($784).

If you prefer to pay off your credit card in full each month, then you might struggle to fully repay your credit card bill if you max out your card. Like with anything, it’s important to only spend within your means so you don’t put yourself into a difficult situation.

Rewards programs

Although credit card rewards programs can be a great way to increase your frequent flyer points simply by spending money, it is important to carefully read and understand the conditions of the cards.

Often, cards with rewards programs come with higher interest rates and additional fees. Sometimes these extras can actually offset the benefits that you get through the rewards program. That’s why it’s a good idea to carefully examine the rewards programs and see if it will work out better for you in the long run.

How to use credit cards effectively

With the pros and cons for credit cards outlined, now it’s time to get into how to use credit cards effectively. When it comes to your credit card, you shouldn’t be over-reliant on it. It is a tool that when wielded properly, could greatly benefit your life. However, credit card debt can be a slippery slope.

So how could you use credit cards effectively? You could start off by finding a credit card that meets your needs, whatever they might be. You should read the terms and conditions carefully. It’s important to always keep in mind that whatever you spend, you need to repay.

Keep an eye on your balance

One way to use your credit card effectively is to avoid maxing out your card. You could do this by keeping an eye on your balance. Investopedia outlines that it’s better to keep your card balance low relative to your credit limit. This is because maxing out your credit card can harm your credit score and indicate to lenders that you’re a risky borrower.

As we mentioned above, there are numerous drawbacks to reaching your limit. These include extra fees and charges, the inability to use your card until you make a repayment and higher risk of defaults.

Make more than the minimum repayments

Although you don’t have to pay more than the minimum repayments by the deadline each month, it could work out a lot better if you do. This is because it could save you from being charged extra interest.

In fact, the best thing you could do is to pay off your credit card in full each month. That way you won’t be charged interest on the remaining debt, and you won’t carry credit card debt into the next month.

Pay your credit card bill on time

Each month, you will receive your credit card bill, outlining all of the transactions you’ve made during the month. Once you receive your statement, you will have a fixed time to pay off your credit card, or at the very least, make the minimum monthly payment to avoid late fees.

When it comes to your credit card, it’s important to pay your credit card bill on time. If you don’t you’ll most likely have to pay late fees and in some cases, extra interest. Not only that, but it could be good for your credit score. Even if you have a credit card that has 0% interest or 0% balance transfer terms, these will likely become void if you are late making your repayments.

Your repayment history is one of the most important factors when it comes to your credit score. If you don’t pay your bills on time or miss them altogether, it could harm your credit score. Therefore, one way to use your credit card effectively is by paying your bill on time.

Be on the lookout for credit card fees

You can incur credit card fees for a number of different reasons and they can add up over time. That’s why it’s important to know what fees you can be charged with your particular card and what triggers them.

Credit cards and your credit score

Your credit score is based on your credit history. Good credit behaviour can improve your rating, as can bad credit behaviour. If you are to miss a credit card payment, then this will show up as a default on your credit report and negatively affect your credit score.

How to use your credit card effectively

There are a lot more aspects to credit cards than meets the eye. There are many things you could do to make sure you’re getting the most out of your credit card. You could repay your credit card in full each month, avoid over-relying on your card, make sure to pay off your bill each month on time and more.

December 9, 2020December 10, 2020

The Dos and Don’ts of Credit

Taking out credit, whether it be a credit card, loan, or mobile phone, can have more implications than you may realise. Unfortunately, these effects aren’t commonly talked about, so you could be harming your credit score without even realising it.

Your credit score is an important number, and it’s one of the benchmarks used to determine your financial health. Taking out credit can be good for your credit score, but it can also have a negative impact. It all depends on how you go about it.

Taking on too much credit or applying for multiple types of credit in quick succession could harm your credit score, which can cost you more in the long run. In order to help you avoid this, we’ve put together the dos and don’t of credit.

What is credit?

Before we dive in, let’s go over one important bit of information – what is credit? As defined by MoneySmart, “Credit is money you borrow from a bank or financial institution. The amount you borrow is debt. You will need to pay back your debt, usually with interest and fees on top.”

Examples of credit include:

Credit card;
Loans – personal (secured and unsecured), car, mortgage, business, student and more;
Buy Now Pay Later services;
Mobile phone;
Internet;
Electricity or gas;
Water.

Your credit score, or credit rating, is a number ranging from 0 – 1,200. The role of a credit score is to indicate to credit providers your creditworthiness, which essentially means how risky of a borrower you are.

A good credit score indicates that you are effective at managing your debt and likely won’t default on your credit. A bad credit score shows that providing you with credit will be more of a risk to the provider. The better your credit score, the more likely you will be approved for credit.

Dos

Taking out credit can be beneficial for your credit score. In fact, you need to have taken out some form of credit in order to have a credit score. So how can you use credit for good?

Make your repayments on time

Your repayment history is one of the ingredients which contributes to your credit score. According to Equifax, your repayment history makes up 30% of your credit score – the second-biggest contribution behind only credit enquiries.

Because of this, whether you make your repayments on time could make a big difference to your credit score. So how can you make this work in your favour? Well, you could ensure that you always make your repayments on time.

There are a number of ways to do this, such as streamlining all your repayments to come out at once, setting up direct debit repayments or adding notifications on your phone.

Make more than the minimum repayments

Did you know that if you only pay the minimum amount due on your credit card that carries interest, you’ll actually end up paying more money in the long term? It’s true!

When you take out a credit card, you’ll need to make a minimum payment each month, which is usually about 2 or 3% of the total amount you owe for the month.

However, when you only pay back the minimum amount, depending on how much you owe, you could end up having to pay back the outstanding balance for years. This means you could be stuck with credit card debt for years, even when you’re not using it anymore!

Think of it like this: your credit card charges you 10% interest per year and you spend $1,000 on your credit card in one month. Your minimum repayment is 2%, meaning you would have to pay a minimum of $20. This means that there’s still $980 that will be charged the interest rate, which will cost you an extra $98.

The next month, the interest you’ve been charged will be added onto your outstanding balance, and then you’ll have to pay interest on the new amount. Add on the fact that you’ll probably spend more in the next month, you can see how your credit card debt can quickly get out of hand!

Keep your line of credit open even when you’re not using it

Keeping your line of credit open, even when you’re not using it, might sound contradictory at first, but it could help boost your credit score. Why is this you may ask? The age of a credit account can contribute positively to your credit score.

Paying your credit bills from a specific account consistently showcases that you have been capable of dealing with this credit account for a long time. This serves as a good indication for a future credit provider that you are likely to handle credit well.

Whilst we’re not advocating that you keep multiple credit accounts open just for the sake of it, you might want to consider keeping some open and in use so credit reporting agencies have data to base your credit score on. You don’t have to go into debt to contribute to your credit history. Instead, you could make smaller purchases with your credit card and fully pay off your debt whenever needed.

In addition to keeping your line of credit open, having different types of credit can also be beneficial for your score. This is because it shows providers that you’re able to handle multiple credit accounts perfectly fine. At the end of the day, that’s what credit providers care about – that you can manage your debt well, and you’ll make your repayments on time.

Find the best interest rates

This might seem like a no brainer, but interest rates can really make a huge difference in terms of how much money you’ll end up paying overall across the duration of your credit. Even a 0.5% difference in an interest rate can cost you thousands over the course of a year.

Take this as an example, the average home loan in Australia is $388,100. If you borrow that amount at 5% interest over 25 years, you’ll pay $292,539 in interest over the life of the loan. But if you borrow the same amount at 5.5% instead, you’ll pay an extra $34,344 in interest!

Because of this, you might want to aim for credit with the lowest interest rates and fees when you apply for credit. If you’re not sure what’s the best option, you can seek the advice of a financial advisor, who can help you make the best decision for you.

Frequently check your credit score

Your credit score changes frequently. Credit providers report to credit bureaus once a month, but not necessarily at the same time. This means your score can change frequently.

If you check your credit score often you can see exactly what influences your score – both good and bad – and take steps to rectify the situation if something you have done has negatively impacted your score.

If you check your credit score, you’re more likely to catch any mistakes on your report early. 1 in 5 credit reports have some kind of mistake on them. Wrongly listed information could cost you valuable points. That’s why it’s important to check your information frequently to catch mistakes early on.

Don’t

We’ve given you a number of things you could do to protect or even boost your credit score, but what are some things you might want to avoid?

Make multiple credit enquiries in a short space of time

When you apply for some type of credit, such as a loan or credit card, before approving your application, the provider will take a look at your credit report to see how risky of a borrower you are. This request is recorded on your credit report as a hard enquiry and it will usually impact your credit score.

As outlined by Equifax, “Hard inquiries serve as a timeline of when you have applied for new credit and may stay on your credit report for two years, although they typically only affect your credit scores for one year.”

Hard enquiries on your credit report can symbolise different things to different lenders. For example, multiple hard enquiries might look like a number of financial institutions have rejected you. Therefore, they themselves may be more likely to reject your application. To be safe, know your options before you dive deep into the world of credit.

On the other side of the coin are soft enquiries. A soft enquiry is when you request a copy of your credit report or check your credit score. Soft enquiries don’t harm your credit score, and they’re not visible to potential lenders when they check your report after you make a credit application. A soft enquiry will stay on your credit report from 12 to 24 months.

Take on unnecessary credit

Your credit score is based on how effectively you can manage debt. One way to harm your credit score is to let your debt get out of your control. Therefore, one thing you could do to avoid harming your rating is to avoid taking out unnecessary credit.

If you’re taking out a loan to pay for something that you don’t necessarily need or you can’t really afford, then you might be living above your means. Before taking on credit, you should ask yourself if this is something you both need and can afford.

In a similar vein, maxing out your credit accounts can hurt your credit score. Just because you have an allocated credit limit, doesn’t mean you should use all of it. Using your full borrowing capacity may affect your credit score and indicate to credit providers that you may be at a higher risk to struggle financially in the future.

Lose track of your repayments

Repayments make up 30% of your Equifax credit score. That means, if you lose track of your repayments and miss, or even default on one of your bills, this could be bad news for your score.

Defaults can stay on your credit report for 5 years, which means any time you apply for credit, the provider will be able to see that you defaulted in the past and that might lead to them rejecting your application.

Prioritise long-term loans

If you’re looking for a loan, it can seem like a smart idea to take out a longer-term loan with a lower interest rate and an overall lower monthly repayment. However, this isn’t always the cheaper option.

Even if you end up paying less each month, because you’re having to make your repayments for longer, you might end up paying more overall. Ultimately, taking on a longer-term loan means that you are committed to making your monthly repayments for more time. If your financial situation was to change throughout the duration of the loan, this could make it difficult to make the repayments.

When taking out any form of credit, it’s important to do your research and calculate the total costs you’ll incur across the duration of the line of credit and not just the monthly repayments. If you’re ever in doubt, you can reach out to a financial adviser who can help you navigate your finances.

Want to know more?

There’s a lot of mystery when it comes to credit scores and the nitty-gritty details can be confusing. However, following the above dos and don’ts could help you get started on improving, maintaining or even building your credit score!

If you want to learn more, Tippla has you covered! Our Credit School is a free online resource which will guide you through all of the information you need to know about your credit scores and reports. So what are you waiting for? Let’s get credit-score savvy!