Yesterday afternoon I overheard two young ladies boasting about their recent shopping sprees, whilst a third complained that she never seemed to have enough money to splurge on a new wardrobe, despite working two jobs outside of her university studies.
Firstly no, I am not a stalker. The volume of this discussion likely enabled it to be heard by anyone within around 50 metres. Loud talking on trains – that’s a discussion for another day. The interesting part of the discussion was the advice given to the shopping-deprived individual.
“You need to get a credit card!”
Witness reactions ranged from smirking to cringing, but there was a common sentiment. A credit card is clearly not the answer in this scenario!
This got me thinking about the pros and cons of credit cards. When is a credit card useful? What are the dangers of credit cards?
When you make a credit card purchase, the bank or card provider is effectively loaning you the purchase amount. It is not free money. Each month you will receive a credit card statement which is basically a detailed list of completed transactions. The statement will specify the minimum repayment that is to be made within a set time period, however the goal should be to pay off the full debt amount immediately to avoid paying interest.
Credit Card Advantages
- Safe, convenient way to pay for goods.
- Can be easily used for online or phone transactions.
- Free short term credit (assuming you pay your balance in full each month).
- Major credit cards are accepted globally making travel easier.
- Purchase/fraud protection programs.
- Reward programs and loyalty points for higher spenders.
- Very low rate balance transfer offers may give you a short time period to pay off debt.
Credit Card Disadvantages
- High interest rates – failure to pay the full amount each month can cost you big time with many credit card interest rates around 18-21% per annum.
- Cash advance interest rates are generally high.
- Beware any fees for late payments, missed payments, excess transactions, etc.
- Credit limits can be higher than needed which allows you to make purchases beyond your means.
- Paying only the minimum payment may result in a prolonged and expensive debt!
- The notion of free money! If you don’t have enough savings to purchase an item this month, then perhaps it is best to hold off on your purchase.
The message here is to make sure you do your research and have a thorough understanding of the full terms and conditions of a credit card before you apply. A credit card can be a good option if you are smart with your money and prompt with repayments. However, if you want more control over your ability to spend then perhaps a debit card is another option to be considered. A direct debit card will allow you to make online/phone purchases in the same way as a credit card, but the money will come out of your savings account rather than a credit facility.
If you are in the market for a new credit card your first step should be to compare credit card offers from a variety of lenders, as this ensures you are getting the right deal for your individual requirements.