Everyone knows the dangers of credit cards – or at least they should. Credit cards issued by our ASX banks like Commonwealth Bank of Australia (ASX: CBA) charge some of the highest interest rates you can find anywhere – usually north of 20%. A 20% interest rate is nearly 2000% more than the current Reserve Bank of Australia’s cash rate of 1%, so there’s a reason why you would probably remember getting a credit card ‘welcome pack’ soon after your 18th birthday – most of the time, the new cards double as a license to print money for your friendly neighbourhood bank.
But there is an army of credit card lovers out there who insist that the ‘fantastic plastic’ is a goldmine for those who know how to play the game – and a chance to turn the tables on the banks for once.
So should you dabble in this dangerous game? Well that depends…
Why it’s a good idea
Most credit cards offer bonuses for using them – usually in the form of reward points from airlines, like Frequent Flyers from Qantas Airways Limited (ASX: QAN) or Velocity Points at Virgin Australia Holdings Ltd (ASX: VAH). These can also come in the form of other rewards points, either from the banks themselves or from other providers like American Express Company.
Points are, of course, offered in exchange for using the cards to purchase items, with specials and bonuses often offered for various partners or items.
It’s also worth noting that although many credit cards charge an annual fee in addition, there are many who don’t, or at least offer ‘specials’ where you can get the card with the fee waived.
Why it’s a bad idea
Credit cards fundamentally change the way you will think and act about money. This happens on a subconscious level, and will almost inevitably lead you to spend money in a more liberal manner than you otherwise would – it’s a simple consequence of being able to use other people’s money.
In order to avoid this, you will need to make a conscious effort to avoid changes in your spending behaviour. Even if you think you understand the ins and outs of credit cards – and swear never to let a dollar of interest accrue, you still need to make sure your spending patterns don’t shift. Constant vigilance and discipline are the keys here.
Credit cards can be worth it for the point and rewards, but for it to be truly beneficial, you will need to make sure that you: A) don’t ever, ever pay interest; and B) ensure your spending patterns don’t get swayed by the ease of spending cash that isn’t yours, just to accumulate a few thousand Frequent Flyer points every year.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.