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Credit Cards – Satan or Saviour?

Credit Cards! Some people liken them to Satan himself, whilst others see the plastic card as an indispensable item in their everyday lives. Naturally, this depends entirely on what type of person one is. Are you a spendthrift that can hardly keep your wallet in your pants? Or are you cautious saver, guarding your pennies like Scrooge McDuck?

The downsides of credit cards are scary. Debts can quickly spiral out of control as fees are stacked on top of existing debt and sky-high interest rates can cause everything to escalate rather quickly. With variable interest rates starting at 15% APR* on most cards and going into the high double digits, it can become very hard and expensive paying down the debt.

*APR stands for “annual percentage rate”. It essentially takes into account the cost of interest and any fees associated with this interest, so essentially gives you the all in rate that you need to pay upon taking out this involuntary credit. But bear in mind that the percentage advertised can fluctuate as it is a variable interest rate and will depend on what the market rate is at any one point in time.

The long story short with credit card debt is never to even get into debt in the first place. Always pay off your card on time! And if you accidentally miss a payment, pay the balance off as quickly as possible. There are many alternate ways of accessing credit if you require it (eg bank loans). Credit cards will almost always come with the highest cost involved.

So now that we’ve touched on the negative aspects of credit cards, let’s focus on the positives:

1. Cash flow – One of my favourite aspects of credit cards is that it helps your cashflow. The label on the tin says it all: credit cards give you credit. Whether you’re running a business and only get paid by your clients 30 days after delivery of your product or whether you do a massive shop on the first day of every month. Credit cards give you a bit of leeway in planning your expenditures and income that debit cards or cash transactions just cannot offer. My credit card cash flow came in really useful when I was booking flights to Asia earlier this year. I could offer to book for my friend and myself so that we had seats next to each other on the flight. And I didn’t have to pay the bill until 20 days, after my friend had paid me his share. Moreover, if you’re entertaining clients regularly in your day job, it also gives you more time to get those receipts together and manage all your expenses in one go without feeling rushed or stressed about the liquidity in your bank account.

2. Points –  Not every card has a membership reward scheme and so this paragraph doesn’t apply to all credit cards. But one other aspect as to why I like using my card is that for every purchase I get points from my card provider. These points can be accumulated and later be exchanged for goods (earphones, iPads etc) or can be exchanged for flights when transferred to any of the major airlines frequent flyer programmes. The most prolific points provider here in the UK is undoubtedly American Express.  The key here is to not overspend just because you’re getting points. A good rule  of thumb regarding AMEX points is that one membership point = 1p or 1/100 of a pound. When taking into account that most purchases equate to 1 point per pound spent, it’s not really worth overpaying just to get the extra points. But then, it’s also nothing to snuff at especially when considering the huge sign up bonuses. The Gold card for example does not have an annual fee in the first year (normally £140 per year) and comes with 20,000 points if one spends £2,000 in the first three months. Not shabby.

3. Extra perks – This section is about the various perks that come with a lot of credit cards. Whether they offer insurance on cancelled or delayed flights booked with the card, preferential Foreign Exchange rates on overseas purchases or free entry to a few of the many airline lounges available under an airlounge card, these offers can be quite valuable depending on how often you might use them.

4. (Re)building a credit rating –  Credit cards can aid in building a credit score. If you’re looking to purchase a home (though hopefully not as a first investment), these cards can help in showing lenders what a great little borrower you are because you’re repaying all your bills on time :).  As we discussed above, a credit card’s disastrous effects on a rating are well-known if repayments are late or are defaulted on. However, there are also a few cards which aid in rebuilding of an individual’s credit rating. They’re not cheap but serve a purpose in demonstrating “creditworthiness” after consistent use of the card and repayment of debts.

There are undoubtedly many benefits associated with credit cards, however, it depends to a large extent on your spending habits. Can you realise these benefits without dipping your foot into the dark pool of card debt service? The key is to keep spending ideally tighter (if you tend to binge) than when you are using cash or debit card.  And always pay off your bill on time!

Happy Tuesday!

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