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Credit cards have a bad reputation, and the truth is when they aren’t used correctly, they can easily become a bit of a money trap.
Carrying a credit card balance is a lot more common than uncommon nowadays, with the average UK adult carrying around £3,724 in debt according to The Money Charity.
For those who are unable to pay off their credit cards in full at the end of every month, having a credit card can very quickly become expensive.
So, does it ever make financial sense to have a credit card? Should we avoid them altogether? The answer is, it depends. Here are some examples of when it may and when it may not make financial sense to have a credit card.
Credit Cards (Red X)
- Spend more than you earn – If you spend more than you earn, unfortunately it will be pretty much impossible for you to pay off your credit card every month. Inevitably, you will be subject to paying expensive interest on the balance you owe.
- Minimum payments only – If you can only afford the minimum payments, you’re pretty much in a trap. The credit card company has you right where they want you, paying them money every single month while your balance decreases extremely slowly.
- Impulse buyers – Credit cards are very tempting and sometimes you can make yourself forget that it’s not your money you’re spending (been there, bought the T-shirt). If you are tempted to impulse buy when you go shopping or when browsing online, it’s probably best to stay away.
- Forgetting to make payments – If you are someone who doesn’t like to automate and set-up direct debits, then it is very easy to forget when your credit card bill is due. Not only will you be penalised by the credit card company with a late fee, but it can also have a detrimental effect on your credit score. And once something hits your credit report it takes YEARS to come off.
Credit Cards (Green Tick)
- To build credit – This is one of the reasons some people are encouraged to get a credit card to begin with. It can be a great tool to build credit as lenders like to see someone’s credit history to see if they are a responsible borrower. If you use your credit cards well, i.e. pay them off in full each month, it makes a strong case that you can handle credit appropriately.
- Big purchases on sale – We’ve all been there. Sometimes making a big purchase is unavoidable, whether that’s a piece of furniture or an appliance, or maybe its currently on sale for a much better price than normal. But sometimes we simply don’t have all of the cash to pay upfront for it. Credit cards can be useful in this instance and help bridge the gap, especially when you know you will be able to pay off the credit card soon after without accruing any interest payments.
- Protection – Credit cards are generous with the protection they offer on purchases. Sometimes they even offer travel insurance when you book a holiday with your credit card (check your terms). Section 75 refunds are applicable on purchases over £100 so can offer some significant protection in the event something goes wrong.
- Points – Some credit cards offer points to their customers for making purchases with their credit cards. These points can then be converted to cash, vouchers, or avios for instance, which means you’re getting a reward for a purchase you were going to make anyway – big win! It is worth doing your research before diving into credit card rewards though, as often these days the benefits aren’t as good as they used to be.
In summary, credit cards aren’t necessarily awful, and can be pretty useful to many. But again, it very much depends on your personal circumstances, your relationship with money, and how disciplined you are to use it within your means.
Diandra Latibeaudiere-Gardner 'Finance Dee' is a 28-year old British-Jamaican living in the SE of England. By day she's a research consultant and by night a finance YouTuber and FIRE blogger