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Do you really need a credit card?

I will never tell a client they shouldn’t have a credit card. I certainly don’t know your personal situation. However, I do want to plant the seed that maybe you don’t actually need one…

Banks LOOOOOVE to give out credit cards.

They might even tell you that you’re better off with one. They press the benefits of offsetting your mortgage and urge that it will help the economy! Did I really just say that? Banks are evil? What? Ok so I’m not saying they are evil, just that at the end of the day the have their interests at heart, and the good folks that work there are simply doing their jobs so they can get paid too.

Without me going into the details of what the GDP is (gross domestic product) and why it is one of the primary indicators of the health of our economy (I may save this for a long boring post when I’ve run out of fun stuff to talk about). Please believe me when I say… credit card debt does not help the economy! Yes they help the banks, but not the economy.

Recently we bought a new house and with it came a new mortgage with a pretty great interest rate. Funny enough a $10k credit card arrived ‘complimentary’ in our letterbox. Our family hasn’t used credit cards for years. So I called up the mortgage broker and tried to cancel it. Interestingly, I was told if we did cancel the card our mortgage interest rate would go up 1.5%! That card is now just sitting in a drawer untouched. Obviously we kept it just for the lower mortgage rate.

Unfortunately what many people don’t realise is that credit cards easily hide the evidence when you are living outside of your means. ‘Living outside of your means’ is when you are spending more money than you are earning.  I know, I can hear what you’re thinking:

“Sure, but I just pop purchases on my credit card and pay it all off full at the end of the month when I get paid. At the end of the day, I’m also earning points, so that’s ok isn’t it?”

But the truth is, you didn’t actually earn that money when you made the purchase. It was always coming later. You spend the money … go to work and earn the money … get the credit card bill … hopefully pay-day lines up before the credit card bill is due … pay off the credit card in full … end up with no more money left … so you put the next purchase on the credit card again …

There is a surprisingly fine line between staying afloat and sinking, even over a short period like ten years. Of course, we all know we should never let a credit card go even one month without paying the balance in full right? Because the interest rate is ridiculous – and if you ever slip up on the due date – they trick you by charging you interest on all your purchases for the whole month!  But we all knew that.

So, when is a credit card OK to use?

Well if you are using it for a benefit (eg rewards) and you already have the money in your account ready to pay it, then there isn’t much harm. But do check that the annual or monthly card fees are still considerably smaller than the benefits

Also, a credit card can be worthwhile when you are travelling overseas. We have travelled to many countries ourselves and our Visa debit cards have still worked without issues, however, it is definitely worthwhile checking before you leave as Visa debit cards are not always accepted in some countries.

So if you’re thinking it’s time to ditch that credit card. Talk to your bank about arranging an alternative debit card first. In our current economy online transactions are often unavoidable. Then consider building up a $1000 buffer of your own cash and treat yourself as the bank. Paying back that buffer as soon as possible, and only using it for when unavoidable cashflow issues occur. Such as emergencies or maybe large expenses you forgot or hadn’t yet worked into your budget. Do keep in mind though a debit card will still charge you interest straight away if you overdraw on your account.

Once you have a buffer

Concentrate on paying off that credit card debt quickly, never to be seen again. Focus on one debt at a time. When the first is paid off use the money you were using on the first debt and transfer it over to the second debt to pay that debt off sooner too. It may even be worth temporarily reducing household expenses and increasing income in other ways on the short-term to pay down extra money on these debts and get them out of the way faster. I have written a post that may help with some ideas to save more money on your household expenses here.

When all your debts are paid (I’m not including the mortgage here). It’s probably the right time to start increasing that $1000 buffer. I have already written a post about the benefits of living on last month’s income here as an effective method to stop living paycheque to paycheque. Next, it would be best to extend your buffer to 3-6 months worth of income, in the event of a crisis. That crisis may come in many unexpected forms (for example, the loss of a job or medical emergency) but that buffer could end up being the financial lifeline that saves you and your family from financial disaster.

This is also a good moment to remind you of the importance of having an up-to-date will and adequate insurances such as health insurance, income protection, life insurance, TPD and Trauma.

If you are currently feeling overwhelmed with credit card debt and need some help, direction or advice? Please feel free to arrange a free chat with me. That’s what I’m here for!

Or even better, book a 1 hour Debt Breakthrough Session with me for just $75 (AUD) and we can find a fast and realistic strategy to pay off your debts without the need to survive on crumbs and water. We will also work out how long it will take to pay your debts off, so one day you can instead use that money being wasted on interest to start saving for the real things that matter in life.

To purchase the Debt Breakthrough Session with me for just $75, follow my Paypal link here:

paypal.me/lauriejgriggs/75