Credit Cards: The Good, The Bad & The Ugly
17/03/2017 The Hopkins Group
Credit cards can be a very valuable tool if they are used correctly and responsibly – but used wrongly, you can find yourself in a whole spot of bother. The majority of bad credit card debt comes from irresponsible spending and a lack of discipline when using borrowed credit. In this blog post, I will discuss some of the pros and cons of including a credit card in your financial toolkit.
No need to walk around with a wallet full of cash and worrying about somebody pick pocketing you and taking your hard earned dollars these days. Thankfully, with our modern society, we can walk into any store and pull out our card and tap and go. Not only can we use a credit card in store, but we are also able to use it in a secure manner when purchasing online. Most banks will cop the burden of fraudulent transaction on your credit card but if you use a regular debit card linked to your savings account, more often than not you’ll have to wear the cost yourself.
Some cards offer the perks of travel insurance when you pay for your holiday using your card. One less thing to worry about – or have to pay for! This can come in very handy if you’re planning a few weeks in Bali, sitting by the pool, enjoying a few rays and a Bintang . . . and your hotel room gets broken in to or you drop your DSLR camera in the pool. Policies do differ so always be sure to read the terms and conditions to make sure you are taking full advantage of this feature.
Ahh one of my favourite things: being rewarded for spending money. Most credit cards come with a rewards points system which can be used to your advantage if you play the game right. Points can be used to pay annual fees on credit cards, purchase flights, fuel and even gifts for your other half (or yourself which is my preferred option). Just note that you actually have to spend a lot of money to actually earn a decent amount of points; although the way I look at it is that you were going to spend the money anyway so why not get a bit extra for your dollar?
If you are a young buck stepping out into the big wide world of independence, then a credit card is a great way to show banks that you are good with money and are able to meet financial commitments. You just have to make sure you make all your repayments and keep it under control! If you have a strong history of responsibly managing your credit card, the banks will look favourably upon you when you’re applying for a loan for a new car or house in the future. A good credit rating will open a lot of doors for you.
One handy – yet often overlooked – benefit of a credit card is the ability to use it in your budget planning. But how? you ask. Every transaction that you make from paying bills to buying a coffee can be paid for by your credit card, and in doing so, creating a bit of an audit trail. If you use cash, you don’t have that recorded history of your spending. Come the end of the month, when you look back through your credit card transaction statement, you can see exactly where your money is going (hello pub lunches) and see where you need to cut back on your spending to enable you to save that little bit extra money.
Interest free periods
In my eyes, this is where the magic happens. Most credit cards come with an interest free period which typically can vary from 15 to 60 days. Instead of using the money sitting in your savings account (or better still, an offset account linked to a home loan) you can use the dollars on the credit card which will cost you nothing if paid back on the due date. This will allow you to earn interest (or avoid paying more interest if you have an offset account) as your money will be sitting in an account you own until the bill due date, and you will be spending the bank’s money in the meantime.
Don’t get greedy
It’s easy to get carried away with spending money you don’t have, but you really need to be conscious of your limits and know to spend within your own boundaries. Banks will often send you invitations to increase your credit card limit and before you know it, you could be the proud – yet stretched – owner of a credit card with a $50,000 limit. But do you really need a card with that much freedom; that much potential to dig yourself into some serious debt? If you can’t afford to make ongoing repayments on large sums, you should go back to the old-school ways and save for big ticket items. This way, you’ll be earning interest on your savings rather than accruing interest on your credit card. Resist the urge to click on the ‘apply now’ button when you receive these credit increase emails and stand your ground!
Look after future you
You really need to consider the impact of your actions today on your financial freedom in the future. If a credit card is used irresponsibly, it can lead to a lot of financial distress for the cardholder. Perhaps the most devastating result of using a credit card irresponsibly is the effect it may have on your credit rating and subsequent ability to apply for a loan. As a young, single party goer, it might be socially acceptable to have a few credit card debts and some baggage from your world travels, but what happens when you go to buy a house with your partner in a few years and your borrowing capacity is affected by your less than impressive credit rating?
All the fees
Make sure you make your repayments by the due date each month! In a perfect world, you should pay off the entire amount each month but at the very least, you need to meet the minimum repayment. Keep in mind, if you only ever pay the minimum, you’ll never really make tracks on your debt – it’s kind of like treading water in the ocean, but not getting any closer to the shore. The banks make their money by charging massive amounts of interest on the money borrowed if you cannot repay it on time. This can be more than 20% so it is extremely important to have your card paid off in full by the due date so you are not charged any interest on the outstanding balance, nor any late fees.
Tips and Tricks
Sure, in travelling the world and eating at the best restaurants, you might collect some awesome Facebook memories, but you’ll also collect some hefty ongoing financial commitments. Wouldn’t you rather redirect those funds to a savings plan or holiday deposit instead?
Here are some final tips to help you get a grip on your credit card behaviours:
- Before pulling out your credit card, ask yourself “Do I want or need this?” If you want it – rather than need it – then it is not a necessity and can be put back on the shelf.
- Lower your credit limit to an amount that you know you will be able to comfortably pay back within the month. This will also reduce the risk of over spending and hopefully avoiding any financial distress in the future.
- Don't fall into the trap of having multiple credit cards as you only need one at most. This will allow you to more easily track your spending and stay on top of it.
Credit cards can be a very useful tool and even help you save money, but you need to use them wisely. If you find yourself in trouble and unable to stay on top of your debts, then a financial planner can assist in creating an appropriate overall financial strategy to help you recover from bad debt.
To take that first step, send us an email or call The Hopkins Group on 1800 726 082 and ask to speak to a financial adviser who will be more than willing to help you break the cycle of bad debt and put you on the path to financial security.
Disclaimer: Shane Light is an Authorised Representative and John Hopkins Financial Services Pty Ltd is a Corporate Representative of WealthSure Financial Services Pty Ltd Level 1 190 Stirling Street PERTH WA 6000 ACN:130 288 578 AFSL: 326450.
General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.
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