Credit cards can be a double-edged sword. While they provide convenience and extra perks, poor credit card management is one of the fastest ways to end up in debt. Credit cards are one of the highest interest ways of borrowing money. If you only pay the minimum each month, it could take you years and additional thousands of dollars to pay off the money you originally borrowed.
Over 70% of adults in Australia have at least one credit card. The average cardholder owes $4,200 and pays $700 in interest every year. What’s more, this debt is growing every year, meaning we’re continuing to spend on cards without fully paying it off—the total amount of credit card balances in the country has grown from $5.9 billion in 1995 to a whopping $51.8 billion in 2016!
This debt obviously needs to be managed better, but these figures don’t necessarily mean that credit cards are a bad thing. When properly managed, credit cards can be used to minimise debt and expenses and also offer additional bonuses. Used responsibly, credit cards can actually be a better way to pay than cash in several situations, such as the ones below.
To Protect Yourself When Making Major Purchases
Whenever possible, you should pay for big-ticket items with your credit card. This is because credit cards have built-in protection that you won’t get with a cash purchase.
Say, for example, you buy a next-gen laptop that breaks when you’ve only had it a few days. If you paid in cash, your chances of getting a refund are down to the vendor. On the other hand, if you paid with your credit card, the card company can reverse the charge on your behalf if you’ve received defective goods.
Credit cards also protect you from fraud. If your card is stolen and someone goes on a shopping spree with it, the fraudulent charges could be refunded quickly by your credit card company after you report the incident.
To Benefit from Rewards and Points for Your Everyday Spending
Many credit cards offer special perks and rewards based on the amount you spend on them each month. These reward systems might include air miles, cash back, or points that you can exchange for shopping vouchers or gifts.
By using your credit card for your normal day-to-day spending, you can accrue points and be rewarded for the shopping you were going to do anyway. However if you use your card just for the points, it’s vital to pay your card off in full every month.
However, most reward schemes are not as generous as they seem at first (you’ll have to spend hundreds of dollars to get a $10 gift card, for example) and you’ll end up spending a lot more than the value of the bonuses if you start paying interest. Points usually expire after a certain length of time and may have other limitations so make sure you read the full terms and conditions to manage your expectations.
If you’re confused by the numerous credit card terms, check out our recent post on the subject to clear things up for you.
To Get a Special Sign-up Bonus
New customers are worth a lot of money to credit card companies. As such, it’s common for them to offer a bonus for signing up. Card bonuses might include lots of reward points, free flights, or even up to a few hundred dollars cash.
If you have a good credit rating and are confident your card application will be accepted, it’s sometimes worth signing up for this bonus even if you don’t intend to use the card yet. Just keep in mind, every time you apply for credit, your score will go down temporarily.
If you do use the card, be careful—cards offering big bonuses rarely offer the best interest rates. It’s also important to read the terms and conditions carefully to avoid any nasty surprises. Some cards also require more spending to get the freebies.
To Make Payments Where Only Credit Cards are Accepted
Some retailers don’t accept cash and will only accept credit or debit cards. Cards are also usually the only way you can pay for purchases made online. While many retailers accept credit or debit cards, one situation where debit cards are not likely to be accepted is when you’re travelling overseas. Hotels and shops in other countries do not normally accept non-local debit cards so you’ll need a credit card to make payment.
There’s also an inherent risk in lugging around wads of cash, especially while travelling. Aside from theft, airport security might get suspicious of why you have plenty of cash on you. It also makes sense to have at least one credit card at your disposal, even if you don’t normally use it. This way you have a backup way to pay for things if ever you find yourself cashless and without any ATMs or banks nearby.
To Improve Your Credit Score
Many people think that being in debt will damage their credit score. In fact, if you don’t have credit, there’s nothing to base your credit score on and you could be seen as a riskier option for lenders. This could make it more difficult for you to be accepted for a loan or mortgage in the future or could mean you are offered less competitive rates.
Responsible use of credit cards (i.e. not missing any payments and preferably paying them off in full every month) can help to build your credit history and improve your credit score in the long-term.
Proper management of your finances, from your credit cards to your loans and investments, is a must. Unfortunately, especially for those who are just starting their own financial journey, doing so can be confusing, if not downright intimidating. The good news is, help and expert advice is always just a call or email away. We at Clever Finance Solutions have the experience, expertise, and, more importantly, dedication in helping our clients find the best financial solutions and make the right financial decisions. Book an appointment with us today and let’s discuss how you can secure a better future for you and your family.