Credit cards – the fantastic plastic, right?
Credit cards are a modern consumer phenomenon. Since the first Diner’s Club credit card was introduced in the 1950s, credit cards have exploded in popularity around the world and it is now completely normal to pay for almost anything with credit these days.
But should you jump on this bandwagon?
In more recent years, the popularity of traditional credit cards has waned somewhat. The proliferation of debit cards offered through banks like Commonwealth Bank of Australia (ASX: CBA) as well as newer buy-now, pay-later (BNPL) services such as Afterpay Ltd (ASX: APT) has seen a decline in interest from young people in particular.
In fact, Afterpay commissioned a study into this trend and found that on average only 41% of millennials (those born between 1981 and 1996) own a credit card, compared with 66% of people born before 1981.
That compares with 57% of millennials who apparently prefer BNPL services like Afterpay.
Why credit cards can be good
There are a few reasons why using credit cards can be advantageous. A lot of people like to have one in case of ‘emergencies’ – say if your fridge or car breaks down (although I prefer a good old-fashioned savings account myself).
There’s also… the points.
Many credit cards from our major banks like CommBank offer ‘rewards points’, maybe even the uber-popular Frequent Flyers from Qantas Airways Ltd (ASX: QAN) for each dollar spent on the card. These can be a lucrative way to use credit cards – a lot of cards offer points without an annual fee, which gives you an opportunity to save some money at no additional cost.
Why credit cards can be bad
There are a lot of reasons not to want to get involved with credit cards. For one, any balance not paid off usually attracts semi-usurious interest rates that can be north of 20% per annum. If not managed carefully, using credit at this kind of cost can quickly lead to financial ruin.
There’s a less obvious but more insidious danger as well. It’s human nature to spend more money if we feel we have more money (ever heard that phrase ‘money’s burning a hole in your pocket’?).
Even though credit is not ‘our’ money, it nonetheless makes us feel richer when its available and we tend to spend more anyway.
At the end of the day, using a credit card is a personal choice. I think its fine to get a credit card (and can even work out in your advantage), but you always have to keep the potential downsides in mind at all times.
Credit cards are immensely profitable for their issuers – so try not to contribute to these profits! Pay your balance off each month and don’t spend more than you otherwise would and you should be fine.
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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. 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.