Credit cards are the source of all financial evil, right?
Or is that the banks that issue them?
There’s no doubt that easy credit can get you into deep hot water.
Deep hot water at the end of a sewer outlet.
Australians owe around $34 billion dollars on credit cards, which is an average of around $4,400 per cardholder. And that doesn’t include interest-free amounts owing, pushing the total debt closer to $50 billion.1
That’s a lot of overspending.
If you owe money on your credit card, then paying off your debt should be your top priority.
If you’re an impulse buy type of person, if having a credit card in your wallet is all too tempting, then you’re probably better off not having a credit card at all.
Now to the part where I say credit cards are not all evil.
Credit cards are not all evil.
There can be advantages to using a credit card to pay for goods and services.
If you’ve got good self-discipline and you’re not in debt then here’s why credit cards can be useful, and how to make the most of your credit card.
advantages to using a credit card
BUILD A CREDIT HISTORY – a credit card can help you build a credit rating quickly. Use it wisely (see below) to ensure you get a good credit rating.
SAFETY AGAINST FRAUD – Most credit cards have anti-fraud measures to protect you and your money. If you’re shopping online, a credit card can be safer than a debit card – if someone defrauds your debit card, they can gain access to all your cash, leaving you without any money. If someone defrauds your credit card, all they can do is max it out. At least you’ll still have cash while you’re waiting for the bank to fix the issue.
REWARDS – Some credit cards come with rewards programs. Depending on how you use your credit card, these rewards can be beneficial as long as you’re not spending money on things you don’t need to get rewards. And of course, you should be able to pay your credit card off in full and on time each month. Check to see if there is a fee on the credit card and if so, compare the yearly fee with the potential rewards to make sure they are worth it.
REDUCE MORTGAGE – A credit card linked to a mortgage offset account can be an effective way to pay down your mortgage quicker. Put all your income towards your mortgage’s offset account and pay all your expenses with a credit card. Then pay the balance off in full each month. The trick is to not spend more than you earn.
UNIVERSAL ACCEPTANCE – Thinking of travelling? Credit cards have universal acceptance whereas your debit card may not.
CONVENIENCE – Paywave is quick and convenient when you’ve got screaming kids pulling on your arms and wanting to press the buttons and you just want to get out of the store already. No carrying cash. No worrying about pins. Can be too easy to spend money though.
EXTENDED WARRANTIES – Some credit cards offer extended warranties and other consumer protections when making certain purchases. Check the fine print of your credit card to see what consumer protections it offers.
how to use a credit card so it doesn’t bite you in the back
ONLY SPEND CASH THAT YOU HAVE – I’m a big believer in spending cash. You can take advantage of a credit card and spend cash at the same time. The rule is, don’t buy it if you can’t pay your credit card off straight away.
Stick to the old fashioned way of buying things and save up first. You can still use your credit to pay and reap the benefits above, but you’re not getting into debt.
STAY UNDER THE LIMIT – Some cards allow you to keep spending even after you’ve reached your credit limit. This is a recipe for disaster. You’ll be charged hefty fees and possibly extra interest, so always stay under your card’s limit.
PAY CARD OFF IN FULL AND ON TIME EACH MONTH – Avoid ever paying interest by paying off your card in full every month. This is simple if you only spend money you already have.
REDUCE THE NUMBER OF CARDS YOU HAVE – Not only can having multiple credit cards get you into hot water, it can also affect your credit rating. Reducing your credit limit can also help your credit rating.
SHOP AROUND FOR AND COMPARE FEATURES, FEES AND INTEREST RATES – What benefits do you want to take advantage of in a credit card? Are you interested in rewards? Or do you want a fee-free credit card. Use a comparison site like Moneyhound to compare credit cards.
DON’T TAKE CASH ADVANCES – Cash advances usually charge extra interest and that interest often starts accruing from the day you withdraw cash.
REVIEW STATEMENT EACH MONTH – It’s important to check your statement each month before you pay it to make sure it’s accurate and that no one else has used your card.
PAY MORE THAN THE MINIMUM – Of course, you’re going to pay the balance of entirely each month, right? But what about interest-free offers? It’s important that you calculate how much you need to pay each month to pay off your purchase by the end of the interest-free period because paying the minimum balance on the statement will not allow you pay off your purchase in time.
BE WARY OF SPECIAL OFFERS – Offers like ‘spend x amount of dollars and receive bonus points’ aren’t really for your benefit. Instead, they can get you into unnecessary debt. If a special offer is too good to be true, it probably is.
AVOID IMPULSE BUYS – Studies have shown that people are more likely to spend money if they are carrying a credit card. If you’re going to carry a credit card, it’s important to know this in advance because knowing it will help you avoid impulse buys.
If you’re not currently in debt and you’ve got good self-discipline, then a credit card can be a useful financial tool that you can use to your advantage.
Do you use a credit card? What do you think – friend or foe?
Melissa Goodwin is a writer and the creator of Frugal and Thriving who has a passion for living frugally and encouraging people to thrive on any budget. The blog is nine years old and is almost like her eldest baby. Prior to being a blogger and mum (but not a mummy blogger), she worked as an accountant doing other people’s budgets, books and tax.