I recently started my first job out of uni and figured it was high-time I got myself a credit card. So, I signed up for an Amex card. Amex has super cool perks (like 2 lounge passes a year with one of their cards) but you pay for these things. And £140 p/yr didn’t really seem to make a whole lot of sense.
So, I opted for a free cashback card whose rates are double what my bank was offering. I filled out a form where I had to state my income, job title and so on. Within a couple of seconds, my application was successful and voila – I suddenly had access to a bunch of credit. A bit too much for my liking but we’ll get to that later!
The thing about credit card companies is that they make money on every single transaction. Taking a lil’ bit of cream from the top. Recession or no recession, they make money. During recessions, sadly, people often find themselves turning to credit card debt as it’s most readily available to them and credit cards companies charge hefty levels of interest (the average is 20%!) so they make their money from latecomers.
And in non-recession times, they make money because we spend more. We’re shopping more, travelling more, eating more and everything more. So it’s a pretty durable biz. So much so that US consumers have a whopper $925 billion in credit card debt. It’s a gigantic industry.
Okay, so why do you need a credit card? Or do you?
Credit cards help you build your credit score. That’s what you should see as being their main function. Numero uno. Not a spend-as-much-as-you-want card. Taking out debt (credit cards = a loan!) and showing that you can pay it back on time is what shows banks you’re able to handle a mortgage. Without credit history (aka a history of you being able to pay off debt), you stand zero chance at being accepted for a mortgage. You could be the savviest saver, paying your bills like rent and utilities on time but unless you have proof that you can handle debt, the banks won’t trust you.
They got badly burnt in ‘08 as we all know since they practically handed houses over to whoever was asking, regardless of whether they actually had a job! Zero background checks let alone any form of credit checks! So now the system is tougher. Much tougher. And quite rightfully so! It’s all done to protect the stability of the overall financial system and lower the risk of default i.e of a homeowner not being able to back their mortgage.
So now you see just how important it is for you to have a credit card so that you start building your credit history and show those banks just how reliable you are!
They’ll get you out of a pickle
Beyond that, credit cards are great for emergencies. Like when your flight’s been cancelled and you need to stay somewhere for the night but don’t have enough on your bank account. So you use your card and pay it off when you get paid. Many cards also provide travel insurance along with all sorts of other bits and bobs.
Credit cards also have excellent levels of consumer protection. They’ll normally cover purchases up to a certain amount if something goes wrong. Like you ordering an item and it shows up damaged, for ex. I read a crazy story of a couple who had put down a £200 deposit for their kitchen refurbishment. The actual job would’ve cost £25k but the company went bust. And guess what? Their credit card provider paid out the full £25k! If you don’t ask you don’t get. This couple was savvy. They knew their rights and what they would be entitled to.
So be sure to always read the small print!
The craziness to credit cards
Within a couple of seconds (literally) my credit card application was successfully approved. I suddenly had all this access to money – not money itself though – the big difference. And in that moment I realised how easy it is for someone, anyone, to fall into the trap of spending what you don’t have – the worst thing you could possibly do for your finances.
Since we aren’t taught personal finance in school, or anything remotely money related for that matter (unless it involves an equation of some sort) it’s no surprise that people get stuck in consumer debt. They don’t know the implication of falling behind on payments (terrible for your credit score) and they don’t know that interest rates on late payments can be as high as 100% (or more). This isn’t a typo! While most credit cards charge you between 18-26% for late payments, some charge way higher rates and consumers aren’t even aware of this.
Psst: this money ain’t free….
The thing about credit cards is that they’re dangling that money right in front of you. Like candy. It’s so tempting. You want it and you think of all the stuff you could buy with your big fat balance. And if you’re not careful enough, you could seriously go overboard. And find yourself swimming, and then drowning, in debt .
So here are some top tips to make sure you aren’t spending more than you can actually afford and that you’re able to pay your credit card bill. On time!
Set up a direct debit, pronto!
Missing monthly payments is how you turn yourself into burnt toast. And we all know with burnt toast, it can’t exactly get un-burnt. There’s no going back. Missing your credit card payment is the single worst thing you can do for your future finances since it destroys your chance at being able to get a mortgage anytime soon. You’ll wait a good few years till you’ve got back your rep and by that point, who knows where the economy could be at. Plus, don’t think it just affects mortgages. Car loans, too! So it’s a whole spiderweb. And you don’t wanna be that teensy spider caught in the middle of it.
So do yourselves a favour and set up a direct debit with your credit card company so that each month you pay off what you owed the previous month. Automatically. The money gets taken out of your bank account so you never have to worry about missing a payment. Ever again. I use AMEX and they’ve got a super easy app to use (this is not a promo!!). I literally set up a direct debit in a few more seconds and I can see what I’ve spend, how much I owe and my remaining balance.
If the thought of a direct debit makes you nervous that you won’t have enough in your bank account, hint: you’re probably spending too much!! If your bank account doesn’t have enough funds, consider yourself burnt toast. So make sure your funds can handle your shopping! Which brings me nicely onto my next point….
Don’t spend more than you can afford
Credit cards aren’t free money. They’re a credit-building tool, albeit a scary one! Don’t fall into the trap of thinking that that’s your money to spend. It’s not. It’s simply yours – on loan. Understand that and you’ll understand how the whole thing works – including how these guys make money.
Everything you buy on your credit card you have to pay back. The more you spend, the more you owe and the more you aren’t able to pay it back, the more that interest pile grows. And grows. Debt in this case is one of the worst things to do for yourself. It’s like you’re constantly lugging around bags of financial baggage. It’s heavy. Emotionally and otherwise. And debt is pretty hard to climb out of. So do yourselves a favour and don’t get hooked.
Money is often an emotional thing for many of us. And for people who have always had issues with money (like blowing their entire pay-check in a week) will find a credit card magnifies it 1000x. If you were always a big fat spender, you need to be extra careful. My friend’s like that. She’s self-aware and knows if she had access to lots of money she’d probably spend it. So she’s holding off from getting a card. And that’s a smart thing to do.
Credit cards can be really dangerous if you don’t know what they’re for/how to use it. So the first step is to control your desires. Stick to a budget (boring, but boy is it useful) and don’t look at all the stuff you don’t have and want.
A credit card is simply a tool. Know how to use it and it can be wonderful; screw it up and you’ll find yourself in a great big mess.
So be responsible. Don’t spend, spend, spend. Especially if you can’t really afford it.
You have more than you need. And with a recession round the bend (lucky us Brits, we’re already in one!) not to mention inflation that’s at a stubborn 40-year high, we can do with all the cash we can get!
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
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