Why get a credit card? Well, they are becoming a way of life these days, and you may need them for a few things. But it’s important to weigh up credit card pros and cons before you decide whether you should get a credit card or not.
Comparing credit cards is worthwhile – but be honest about your own spending habits before you sign up. Credit cards are only handy if you religiously pay them off each month, and some people find they simply can’t do this. This form of unsecured debt has the potential to derail your whole life, and the debts can mount up quickly if you are not super-disciplined.
Should I get a credit card? Credit card pros and cons
Credit cards offer the convenience of contactless payments, paying for your purchases after an interest-free period rather than paying for them immediately, secure payments for online shopping or travelling overseas, and the benefits of price protection and purchase protection.
However, although it is a convenient way to pay, you need to understand that it’s not free money. Apart from payday lenders, credit cards are the second most expensive way to borrow. With interest rates ranging from 7.99% to 23.50% and annual fees ranging from $0 to $700, clocking up purchases on a credit card with the buy-now-pay-later strategy is a sure fire way to kick start a debt habit.
If you have found yourself struggling to repay debts in the past – even to the point of not paying back Jim $20 for lunch last week at work – then a credit card is not for you.
The second point that shocks most people concerns the minimum monthly repayment, outlined on their credit card statement. For instance, my credit card statement gleefully tells me that if I pay the minimum of $126/month on my debt of $6,240, it will take me 38 years and 5 months to pay the debt off in full. And not only that, I will hand over to the bank an extra $11,861 in interest charges for the privilege. Now that’s a scenario I could well live without.
It’s very easy to impulse purchase
The third trap with a credit card is that it is too easy to buy something you can’t really afford. We live in such a disposable world, with temptation all around us to buy stuff to keep up with the Joneses or to please family and friends.
It’s too easy to pull out the plastic, especially if you don’t know what you’ve already spent towards your credit limit that month. After all, it doesn’t feel like real money if it’s not cash or a debit card with a defined amount of money loaded on it.
Paying off a credit card… with another credit card?
The secondary phase of the credit card debt vortex is getting another credit card to pay off the first one. It’s an ugly situation but one that, sadly, many find themselves in. Meanwhile, the interest rates make sure the debt keeps growing and becoming even more unserviceable.
If you do find yourself in a dire situation thanks to credit card debt, there are things you can do. By taking action swiftly, you can stop a small problem from becoming a much larger one.
ASIC’s MoneySmart website advises immediate contact with your credit provider to apply for a hardship variation. Or you can negotiate a repayment plan. The key here is to make sure you can afford that repayment plan. There is no point agreeing to a monthly amount that is too high for you to pay. If you find you can’t stick to the new arrangement, tell your credit provider straight away. Keep paying as much as you can afford, even if it is not as much as the credit provider is asking for.
Note that all of the above only potentially applies if you don’t pay your credit card in full each month. If you DO pay your credit card in full then good work – it’s a useful form of credit!
In credit card debt? There’s help available!
Ask for help from a financial counsellor if things get beyond you.
You can call ASIC’s National Help Helpline on 1800 007 007. This free hotline is open from 9:30am to 4.30pm, Monday to Friday. When you call this number you will be automatically transferred to the phone service in your state (opening hours can differ in different states). Calls from mobile phones may incur a fee from the mobile phone carrier.
Other organisations can also provide a range of credit, debt, and legal services to help you:
- Queensland – Legal Aid Queensland 1300 65 11 88
- New South Wales – Financial Rights Legal Centre1800 007 007
- Victoria – MoneyHelp 1800 007 007 and Consumer Action Law Centre 03 9629 6300
- South Australia – Consumer Credit Law Centre 08 8342 1800
- Tasmania – Consumer Credit Helpline (Hobart Community Legal Service) 1800 232 500
- Western Australia – Consumer Credit Legal Service 08 9221 7066
Learn more about Credit Cards
- How do I find a credit card for my needs?
- I am a student – should I get a credit card?
- Can I get a credit card with with no credit history?