Credit cards – are they a good or bad thing?
So often we see people with huge debt and regularly these are credit card debts.
Credit cards are easy to obtain when you first begin work and, with minimal fuss, you can have $2000 to $3000 credit available to you.
Credit cards are used in one of three ways.
Firstly, and by far the best way, is to use your credit card and then pay the complete balance of the credit card each month.
The benefits are you are using the line of credit for the 55-day interest-free period, so you are keeping your money in the bank.
Pay if off before the due date and the bank gains no interest from you.
This way, the credit card can be used for everyday purchases and, with most businesses accepting credit, this is really easy to do.
You can also pick up the rewards such as air points and grocery vouchers.
The challenge is that you have to keep an eye on your expenditure so you have the funds to pay the full balance every month.
Secondly, the credit card can be used just for emergencies or unexpected expenses that tend to crop up, like a flight to Uncle Sam’s funeral in Auckland.
Using the credit card this way is best if you don’t have the ability to keep track of your expenditure.
In other words, you like to spend!
We were once told by someone from a bank that if you have difficulty with using the credit card, you could put it in a self-sealing bag full of water and put it in your freezer.
This way, if you have something unexpected or an emergency come up, you have enough time while the bag is defrosting (you won’t be able to put it in the microwave, as you’ll cook the card) to think about whether you want to use the credit card or try to come up with an alternative way to fund it.
Thirdly, and, unfortunately, the way most people that we see have used their cards, is to pay only the minimum each month and have the card at its very top limit.
As part of our life lessons game that we have developed, we have credit card debt. One of these cards is for $4500. At a 20% interest rate with a minimum monthly payment of $80 ($20 a week), it will take 14 years to repay.
You will pay $13,419 – so that’s $8919 worth of interest!
By doubling your payment to $160 a month ($40) a week, you will pay a total of $6123.
With interest of $1623 included, that will take you just over three years to repay. It is definitely better to pay more each month, but the best option (and really it should be the only option) is to pay the full amount every month.
If you find yourself in the above scenario, the best thing you can do is chop your credit card up and try to pay it off as fast as you can.
This will help you avoid using it again and get you out of the cycle of paying one week and using it again the next.
Credit cards are exactly just that: they are cards that are loaded with money that is not yours and if you do not have the ability to pay the full amount every month, then you should not have one.
They are too easy to use and if you like to spend money you haven’t got, then you will end up in a whole lot of debt, worry and stress.
This is something we do not want to happen to you.
★ Katrina Kelly is a financial mentor for Family Works and the North Otago Budget Advisory Service co-ordinator.