It pays to be informed with credit cards

Students and young adults with only small incomes would do well to avoid credit cards. It might be better to opt for a debit card that is linked to a transaction account. That way, you will spend only the money you have and incur only minimal account-keeping fees.

Credit cards can be convenient, especially when travelling overseas and making purchases online. And a credit card can be good to have in case of an emergency. But unless credit cards are used wisely, they will be very expensive. For starters, foreign purchases will usually have a foreign transaction or currency conversion fee of 2 per cent to 3 per cent. And then there are the eye-watering interest rates charged on late payments.

Those interest rates on credit cards can be more than 20 per cent a year if the debt on the card is not paid off in time. Usually, the marketing for the cards will say the cardholder has up to 55 days to pay off the card without being hit with interest.

What is not well understood is that with most cards the whole debt has to be paid off by the due date to avoid interest. In other words, even if part of the debt is paid off by the due date, the interest will apply to the entire debt.

Regardless of whether the whole debt is repaid, the card requires a certain minimum amount of the debt to be paid off each month.

There are penalties in failing to pay the minimum. The interest could be charged back to the purchase date and the interest-free period could be cancelled on further purchases.

You should also be aware that paying for a taxi or booking a flight with a credit card is likely to incur a surcharge. Paying by debit card sometimes incurs a smaller surcharge or no surcharge at all.

For those who get into trouble with their credit cards, the credit-card companies have a ready solution: the balance transfer offer, where a card has a low-interest or interest-free period on the balance that is transferred.

Usually, the interest-free or low-interest period lasts for a period of months.

You will still have to meet the minimum monthly repayment, and any annual fee and the remaining balance after the interest-free period will accrue interest.

Then there is the appeal of the rewards points schemes and all those free flights and other goodies on offer. Closer inspection shows rewards schemes are not as good as they first seem.

The cards with rewards usually also have higher annual fees. Jeremy Cabral, the personal finance publisher at carditcardfinder.com.au, says a spend of $20,000 might be needed to translate into points worth a mere $100. A student with a part-time job is going to be paying higher annual fees for nothing in return.

If looking for a credit card, do not just go with the card offered by your bank. First check out what is on offer from the non-profit mutual banks, credit unions and building societies.