Credit Cards – are they a good idea?
The answer to this question is YES of course, especially if you happen to be a bank! The banks make an incredible amount of money from credit cards because people love the concept of “buy now and pay later” without thinking of the expense and increasing debt that can be incurred from incorrect use of credit cards. Credit cards can be a great help in a situation where you need some money to pay a bill and you don’t have the money instantly in your bank account but I would only recommend having a credit card if you know you can pay off the entire bill every month. Once you get into the situation of only paying the minimum payment you start the banks interest rates which usually range between 19-22%. This can then escalate quickly into a debt that you shouldn’t have had in the first place.
How do I stop the credit card debt?
Of course the best way to stop worrying about credit card debt is to not have one in the first place. As I previously mentioned in the post 3 step guide to financial freedom a debit card is a good alternative because you must have the money available in your bank account before you can spend it. If you want to have a credit card for occasional situations when they are handy (such as for online accounts), then read on.
Banks don’t care who you are or if you can pay off the debt.
Recently my 19 year old son started an apprenticeship. I’ve been going through the processes with him of setting up bank accounts, Superannuation accounts and all the paperwork involved with the new job. Even before he had this job and had only a casual part time job, we visited a bank and they asked him if he would like to apply for a credit card. I was shocked! When we arrived home he told me and asked some questions about what owning a credit card involved. When I told him that it was credit and he would have to pay everything back or the bank would charge him outrageous interest charges, he said “Dad why would the bank offer a young person on a part time job such a deal?” I told him it was because both the bank and their employee wanted to make money out of him and they don’t care about anybody’s welfare but their own. He received his first reality check on how much banks really care about us.
Which credit card is best?
After mentioning how easy it is to get into trouble with credit card debt I thought it would be a good idea to briefly talk about different types of credit cards and which is best for us. I will include at the bottom of this post links to related websites and include here a link to the ASIC Moneysmart website that has a great article on choosing credit cards.
You’ll quickly be confronted when investigating credit cards by the terms Gold, Silver, Platinum, Concierge, Travel Lounge, Points Bonus, Free Travel Insurance. What do they all mean? They usually mean nothing in life is for free and the more you spend on your credit card, the more useless offers you’ll be given, thinking they are for free when they actually are not! The toasters, coffee grinders or clock radio you can buy with the “points” you have accumulated are inevitably cheaper to buy with the savings you would make by not paying for the privilege of having a premium credit card in the first place.
So my best advice is to not pay for a credit card. Some providers offer cards that include “NO annual fee for life” and these are the cards that I like. Why pay for a credit card when some are on offer without an annual fee? You also do not need to have a credit card with the same bank you have your normal bank account with. I have not had a credit card with my savings bank for at least 10 years. You also need to check the details of any offers from banks before deciding which card to choose. The cards that have no annual fee will usually not offer as many incentives such as gaining points to spend on flights etc but I think if you do the maths you’ll find that air fares are so cheap now you would be better off buying a fare rather than paying an annual fee for the card.
I hope this has helped you and if have a question please ask it in the comments box below.