You and your credit card - for better or for worse?

You and your credit card – for better or for worse?

Many articles have been written about the evils of credit cards, but these accounts needn’t be your worst nightmare – if you treat them with the same respect you would a loaded gun.

Why are Credit Cards perceived as bad?

The three main reasons that credit cards can be dangerous are:

1         The most obvious one – no cash is paid out for a purchase, no money is taken out of your bank account so you think you still have loads of cash left and can spend more, often forgetting to take that credit purchase into account (in fact often forgetting about it altogether...).

2         The interest rate that the bank charges on a credit card is usually higher than any other loan account that you could ask the bank for, making it a very expensive luxury.

3          The purchases made can quickly build up to an outstanding balance where the monthly minimum repayment is a commitment that seriously impacts on your monthly budget (especially if you have more than one credit card account). If you’re not careful, the repayments can become more than you can afford resulting in the trap of immediately using up the amount you just paid off in order to make it through the month. Thus the account is never paid up, the balance owing never reduces, and you can’t sleep at night because you can’t see how to rid yourself of this perpetual debt.

The most annoying thing about this cycle of debt is that most credit card purchases are luxuries like clothes, holidays and dinners at a fancy restaurant. You could kick yourself when you look back at the sales items you never wear anyway, the friend you treated to lunch who never reciprocates the offer, and the dream holiday where you ended up with malaria!

The other reason that we buy into the credit card marketing ploy is because people who flash the fantastic plastic are seen as successful and trendy. Our ego tells us that we need one too, just to be “in”. I fell into this trap not so long ago myself. Having been a careful credit card user all of my life and having stuck to my golden rule of using only one credit card, my ego suddenly succumbed to the prestige of owning a Diner’s Card. I justified it to myself because I was travelling a lot at the time and this card got me into the Private Lounge (ego again?) to wait for my flight.  I came to my senses about 3 months later, after whizzing down yet another quick pink gin and tonic in the 5min before my plane needed boarding. Did I need the Private Lounge? No. Did I need the extra card? No. Was I paying double fees for two credit card accounts? Yes. Why? Because it made me look good. I no longer have this card.

 So, how should one make use of a credit card?

There are really only 4 reasons to use a credit card:

1          To take advantage of a sale or bargain on an item you need, such as a new fridge (and not, for example, a holiday). Obviously this only applies if you don’t have the cash on hand. If at all possible pay off the whole amount on payday, or at least as much of it as you can afford. That way you will avoid some, or all, of the interest that the banks charge.

2          In an emergency situation, such as medical expenses when you have no cash or to attend (or arrange) a funeral that hasn’t been prepared for. Note: Buying shoes to match the outfit to the funeral is not an emergency.

3         To improve yourself and your money-making capability by paying for a course, diploma or degree. In the long run the benefits will far outweigh the cost. First find out if your bank is prepared to give you a student loan though, as that would be a cheaper option.

4          One reason to buy on credit that falls under “emergency situation” but that merits special attention is to buy food and essentials when you have no cash to do so. If you are retrenched and don’t immediately find another source of income, for example. Always buy only the bare essentials. Don’t get into debt for luxury goods.

Quite often a credit card company may have special offers, such as voyager miles or some other points system that has real value. Free travel insurance if you buy your air tickets on your credit card is one example. Be smart in your use of theses offers. Use your credit card, but pay the full amount off again before the first instalment falls due. If you pay before the end of the month (check your terms and conditions), most credit card companies don’t charge any interest, so you obtain the benefit advertised without a charge. Do not however draw the cash from your credit card to pay for an item. On all cash withdrawals interest is charged from day one.

I know of an acquaintance of mine who bought a car with his credit card (he obviously had a huge limit) and then used the voyager miles to pay for a nice holiday! He transferred the money from his money market investment about two weeks after the purchase so he didn’t pay any interest. You see, he had studied the terms and conditions and applied his mind to the best use of his card.

Use these tips to master the use of your credit card:

1         Only have one credit card account (in fact, let it be your only account – clothing and other shops that offer accounts are pretty much the same as credit cards. At least with a credit card you can buy anywhere you like).

2         Only use it for emergencies or as a last resort.

3         Where possible pay the balance off before the first instalment is due.

4         Ensure that you really need a credit card. If the only reason you have one is because it’s “cool”, please have a rethink.

5         Work those special offers to your advantage.

Go take control of your credit cards. It’s easy once you know how.