Credit Cards Friend Or Foe

What’s your experience been with credit cards? I’m sure this topic generates some strong love/hate emotions depending on what experience you’ve had.

There’s even some financial gurus out there that tell you to cut them up and never use them again, no matter what the circumstance!

Well there’s a few things to unpack about credit cards and by the end of the post you should hopefully have a more balanced view.

The Bad

Fees

The majority of credit cards have an annual fee. This is usually waived in the first year as an introductory offer but can sneak up on you once you start getting comfortable with the card. Depending on what card you have this could end up being hundreds of dollars each year. Over a lifetime, hundreds of dollars can turn into thousands. Do you know how much you're paying annually for your credit card? NOW is the time to find out. 

Interest payments

If you don’t pay off the outstanding balance you will incur interest payments. Out of all the financial products out there, credit cards have some of the highest interest repayments. According to RBA data, the average interest rate is 17.92%. Let’s do a worked example. Let’s say you had $5000 in credit card debt and only made the minimum number of payments to clear it. How long would it take and how much would you pay in interest? 

I hope you’re sitting down. Using MoneySmarts website, it would take you over 34 years and you’d pay over $17k payments. 

This is a good segue into my next point.

Discipline 

Credit cards take discipline. If you want to stand a chance at using them effectively, you need to pay off all of the outstanding balance each month, every month. It’s not magical free money, it is a debt you have created for the month that needs to be settled. 

The Good

Credit Card Protection

One of the key differences between debit and credit cards comes down to when the card gets stolen. A good analogy I read recently is that if your debit card gets stolen, they are spending your money which is harder to get back VS with a credit card they’re spending the credit card companies money. How much time do you want to spend on the phone trying to get back your money?

Having a credit card gives additional benefits

The majority of credit cards have some kind of additional perk to get you to sign up. This could be in the form of a discount on your groceries, free travel insurance or some other benefit. It’s worth considering how often you would use that benefit and what the cost of it would be if you purchased it separately to ensure it makes financial sense for you. 

My Two Cents

Personally I used to be dead against credit cards but over time I have developed the discipline to use them and benefit from the rewards. I was in the position where I was going to spend the cash anyway so I may as well get rewarded for it.

How about you? Do you think credit cards are friend of foe? Is now the time to relook at your relationship with your credit card?

Disclaimer

None of  the content is intended to provide you with personal financial advice. This piece is intended to be for educational or entertainment purposes only. You may wish to seek independent financial advice from a professional advisor for advice pertaining to your specific situation.