Some people probably shouldn't have credit cards

You know who you are!! If your spending is out of control and you are getting further into debt, then don't kid yourself. Cutting up the credit card may be the only way to start the process towards greater financial security.

The most common complaint from problem spenders who have been told to cut up their credit cards is that they will lose the convince of paying by credit card. Purchasing goods online is one area where credit cards were once essential. But over the last few years there has been a rise in the number of banks offering debit cards. These work like a credit card, allowing you to buy goods online or over the phone. The only difference is that you need to have enough money in your nominated account to cover the transaction, similar to EFTPOS.

Purchasing goods online is one area where credit cards were once essential. But over the last few years there has been a rise in the number of banks offering debit cards

If you don't have access to a debit card service, there is another trick that I tried some years ago when I wasn't sure I could trust myself with a credit card. Apply for a credit card with only a $500 limit. Keep the limit at $500 no matter what. When you get one of those letters from the bank that starts "We plan to rise your limit unless we hear from you within 6 working days", you must be disciplined and ring your bank up to refuse the increase.

I advocate this approach with caution, but a credit card with a small limit will give you the convince of buying goods online without the temptation to spend thousands of someone else's money. You will also get some of the benefits I discuss in the next section, that disciplined spenders who use credit cards enjoy.

Most people should use credit cards

A credit card represents a free loan from your bank. For a relatively low annual or monthly fee, you are likely to enjoy:

  • Interest free periods of typically up to 60 days
  • The convince of not having to worry about how much cash is in a particular account when shopping
  • The ability to consolidate much of your spending into a single monthly bill
  • Possible rewards programs like cash back or fuel vouchers
  • A card that you can use in many places around the world (if it is a major credit card such as Visa or Master Card).

The catch is that you must pay your card off each month. Never, never let the balance roll over. The base interest rates can be over 20%pa and there are often other fees and penalties that creep in if you are not paying it off on time each month.

If you had a $10,000 credit card debt for example (low by some peoples standards) that you let roll over, you are likely to pay at least $170 each month in interest. This is money for nothing. That flat screen TV you slapped on the card will suddenly get a whole lot more expensive that the price tag it had in the store.

Another thing to watch out for is many card providers will charge you interest from the day you buy things if you don't pay the whole balance off every month. You won't be charged interest initially but interest will be applied and back-dated if the balance is not paid in full. Also remember that cash advances usually attract interest even if you have been paying your balance on time, so avoid using cash advances unless it is a real emergency.

Summary

We have aimed to provide a balanced look at the risk and benefits of owning a credit card. For disciplined spenders, having a credit card is a no-brainer. But if you can't handle the temptation you should probably get rid of your card until such a time as you can trust yourself with it.

If you do use a credit card, don't let the bank offer you a higher balance than you actually need. Make sure the credit limit is appropriate to your income. Ask yourself how long it would take to pay it off if you found you had spent the whole limit (the answer should be less than a month). Above all, make sure you pay your card off in full each and every month!!