At this time of year, many people are giving their credit card a good work out. Here I’ve taken a look at some of the pro’s and con’s of credit cards. Are credit cards good or bad? How can you make them work for you not you for them?
I am not personally opposed to credit cards. We have one and have had for many years. I personally like the convenience of using it to purchase over the internet (although there are now alternatives) and I do enjoy the points we accumulate by using it. That said, I am very much of the opinion that you should only spend what you have available unless you are borrowing for a specific purpose (such as a house or car).
Many people use a credit card to buy things they can’t otherwise afford or live a lifestyle that they can’t support on their income. I have helped many families develop budgets and seen first hand the stress that credit cards can cause. Many families I have seen have multiple credit cards that they have no way to pay off and are being charged thousands of dollars in interest on. Some are even using one credit card to pay off another while still purchasing things their incomes just can’t support.
These are what I see as the pro’s and con’s of credit cards and some of my advice on how to make them work for you.
Pro’s of Credit Cards
- Convenient (especially for online purchases).
- Can be used to accrue points and rewards.
- Can be helpful in keeping track of all expenses in one account.
- Can allow you to keep money in an offset account to pay down a mortgage more quickly (be warned, this only works if you stick to a strict budget and always pay your card in full!)
Con’s of Credit Cards
- Easy to spend money you don’t have.
- High interest rates.
- Can become a trap where you build up more and more debt you can’t manage.
- Can impact negatively on your credit rates.
- Reduce your borrowing power for things such as a mortgage.
- Can be fooled into low introductory interest rates only to discover it then reverts to a very high rate.
As you can see, without very careful management it can be easy to fall into debt. Generally I suggest families only use credit cards for planned purchases (such as monthly direct debits for insurance etc) and larger purchases where the money is in the bank and ready to pay it off.
Some people do use a credit card as a way to keep as much money as possible in the mortgage offset account. This only works if you are very disciplined or aren’t fussed about spending well above your budget (and have the money to do this!). The problem with this method is that by the time your credit card bill arrives it is too late to cut back on spending. It isn’t easy to track if you are keeping to your budget as you don’t see the money dropping with each transaction. Most people I have seen end up over spending their budget by much more than they save having the extra money in the offset account. Keep this in mind if you plan to use this strategy!
Tips to make a credit card work for you
- Only spend what you have available in cash.
- Transfer money onto the credit card or into a separate credit card account to pay off your spending as soon as you make it. Otherwise you will get to the end of the month and have spent your cash AND put things on your credit card, which you now won’t be able to pay off.
- If you use the card for regular bills, transfer the money onto the credit card in advance each month so your card is in credit. We do this for internet, phone, health insurance and other bills that require a credit card or direct debit arrangement.
- Keep your limit low. Think worst case scenario and keep your limit to a level that you could pay off in a couple of months if you maxed it out unexpectedly. If you have a small or average income, having a $5000 or $10,000 credit limit is not a good idea as you’d be unlikely to be able to pay this off quickly if you did max it out. I have seen many families with $30,000+ in credit card debt and no way to pay it off. It is much easier to avoid getting into debt than to try and get yourself out.
- Consider a debit MasterCard or Visa. When we first got a credit card it was for the purpose of purchasing online, debit card options for online purchases didn’t exist. Now there are a whole range of options and if you are not likely to be able to manage to keep a credit card under control, these may be a good choice.
Overall, there are both pro’s and con’s to credit cards. My opinion is that they are neither “good” or “bad”, it just depends how you use them!
If you would like help in setting up a budget for your family and managing debt, feel free to get in contact to discuss my budget review services. I’ve helped all sorts of families in different circumstances get on top of their finances, save money and get out of debt and I’d love to help you too!