Is it a good idea to use a credit card for your spending money?
I think executives working at Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) would all instantly answer yes to that question.
There are some good sides to using a credit card. You supposedly get better payment protection. You can delay your cashflow expenditure by a few weeks. There are certain benefits, perks and points you get if you’re part of rewards programs. But the points don’t amount to much these days, and they’re nowhere near as good as the ones we hear about in the US.
Is all of that enough to make up for the downsides?
There are some people that can perfectly manage their money, pay on time and never pay a cent in interest. But those people are benefiting from others who have racked up enormous debt.
Unless you pay in full on time, every time, you could be slugged interest at a rate of around 20% or higher. This can be a terrible cycle to get stuck into if you’re mostly just paying off interest – which is what happens with the ‘minimum payment’ over a long time.
It’s also important to remember that your credit limit isn’t your money, it’s money that the bank wants to loan to you at a very high rate. You should only spend money that you were going to spend in the first place if you do use a credit card.
Whilst I don’t have a credit card, I can see the benefit of having another method of paying for items. Imagine if your only transaction account were to be locked due to fraud and you couldn’t spend money. Of course, that problem could be solved with a second debit card bank account.
Credit cards have their place, but I don’t think they’re a good idea for a lot of people where the negatives that can happen if your personal finances were to go downhill for a period of time.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.