Credit Cards: Evil or Not?

Want my opinion”¦. There’s only one good way to have a credit card. That is to only have one, if you actually don’t need to have one.  Stick with me.  I know it seems a bit counterintuitive.

If you get a credit card to help you buy things you can’t otherwise afford, it’s a slippery downhill slope and it’s one which so many Australian’s are on. Here’s why:

–       Credit cards charge insanely high interest rates

–       Repaying the minimum amount on a credit card takes you an incredibly long time

–       Credit card debt is one of the easiest forms of debt to get and one of the most destructive 

So of course I don’t have a credit card right? Wrong, I have two. And it’s ok if you have a credit card as well, but (in my opinion) only if you can say yes to the following three points:

  1. You have the funds to pay off your credit card EVERY month in full prior to any interest being charged (set your limit so that this is ALWAYS achievable).
  2. You automatically set your credit card to pay in full EVERY month prior to the interest being charged (yep – your bank can do this for you). 
  3. There must be some other benefit to using the card. Either of the following (or preferably both): a) You have an offset account, so that the days you’re getting interest free before you need to pay your card off (in full) means you’re offsetting that cash against your mortgage and paying less interest on that. AND b) You get some sort of points benefit (say frequent flyer points) that isn’t offset by the annual fee you pay.

 Unless you can tick off 1, 2 and 3. Don’t get a credit card OR if you already have one (or more) make a plan to pay off in full and get rid of what you already have.

Don’t be fooled by the lure of free money. Credit cards could hardly be further from that.

Here’s some fallacies I’ve heard people say about “needing” to have a credit card.

1. I NEED a credit card because there are certain things you just NEED to book on credit card – like air flights.

WRONG: You can book most flights using POLI (a direct transfer to the airline) or you can get a VISA debit card set up to your savings account giving you the same ability to put in a credit card number, but it only uses the cash you have in your savings account (ie: there’s no credit limit).

2. I WORK the system in my own way. I spend on card, then if I can’t pay it off I just do a zero balance transfer so really – it is free cash.

I THINK: a zero balance transfer works just once, if things get out of control. Do a zero balance transfer, cancel the old card (to stop you getting into further issues) and make a plan to religiously pay off the zero balance transfer balance every month so that by the time the 6 or 12 months interest free is over you’ve paid off every last cent – and then cancel that card. If you’re using this as a regular strategy you can’t afford what you’re actually buying and it’s very likely eventually you will not be able to “use Peter to pay Paul” because Peter, will stop extending you the cash. The banks only do zero balance transfers because there is something in it for them. They’re a business after all – if they weren’t likely to make money on the deal they wouldn’t do it – remember that.

3. The credit card company WOULDN’T give me a card if I couldn’t afford it.

OR: They do. I recently worked with a client who had multiple credit cards, all in hardship, to the same credit card company. Where was this lender’s duty of care to this person in letting them have 3 cards, all maxed out and all currently beyond their capacity to pay? 

4. It doesn’t do me any harm to have a whole heap of credit cards. I just like the security of them.

SURE it doesn’t do you any harm, unless you care about your credit rating (too many searches, enquiries or credit facilities harm your overall rating and ability to get a loan) or about potentially getting a home loan later on in life. Banks treat each credit card you have (whether you use it or not) as though it’s at it’s absolute limit. If you don’t need it, cancel it and keep the cancelation letter (to provide to your broker to negate any enquiry a bank may have seeing it listed on your credit report).

5. I NEED a credit card so that I have a good credit history and can get a home loan.

Pure insanity. There is one lender we work with regularly who having a credit card with will help you be able to borrow a higher percentage of the purchase price with them, but aside from that – it’s not necessary. We’ve helped plenty of people buy homes who have never had a lick of credit previously – it is not essential for buying a home.   

 

Over 7055 Australians in just the last quarter of 2016 went into some sort of bankruptcy, debt agreement or insolvency. Men are statistically more likely to do this: about 57% of those who enter into agreements related to insurmountable debt issues are men. The most vulnerable age categories are those of us who are the youngest and fit into the categories: 17-34 (just under 35%) and those 35 – 49 (around 43%). And what causes the slip to insolvency, debt agreements or bankruptcy? More than 80% are for non-business related reasons with unemployment or loss of employment being the primary reason, and second to that – excessive use of credit. I suggest (and it’s purely my opinion) that the unemployment is often coupled with excessive use of credit as well – a deadly combination that’s easy to imagine if someone has a lot of credit and suddenly loses their job.

While I may not know you personally, I don’t want you to be one of that 7000 Australian’s a quarter in over their head. I know this 7,000 intimately due to my own personal story watching this happen to loved ones. If you feel like you’re in trouble or may be heading that way, contact the free and confidential financial hotline on 1800 007 007.

– Kirsty 

 

Stats Credits: https://www.afsa.gov.au/statistics