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Here’s why using a credit card is dangerous in 2020

It’s hard to believe, but the concept of a credit card hasn’t been around all that long. In fact, the first credit card (as we know it today) was introduced by Diners Club in 1950. American Express followed a few years later in 1958 and the modern consumer hasn’t left home without it since.

According to data from the Reserve Bank of Australia, 19% of all payments in 2019 were made with a credit or charge card.

Why are credit cards so appealing? Well, on a fundamental level, I think it’s because it’s fun and easy to spend other people’s money. It’s a habit that is easy to start and can be difficult to stop.

Now, many people will tell you that they only use credit cards for ‘the points’ or to manage cash flow. But the data suggests that many people are falling into the trap of not paying the cards off in order to avoid interest.

The pitfalls of a credit card

According to reporting from the ABC, the average Australian credit card balance is $3,258. Of that amount, about two thirds (or $1,986) is the average amount accruing interest.

It’s a staggering statistic. These interest rates are truly brutal. Most major credit cards typically charge an interest rate of between 12-30% per annum. They also typically compound daily once the ‘interest-free’ period expires.

Compare a 20% interest rate to the current cash rate of 0.25% (which may be lowered to zero today). It’s insanity. You could expect a return of around 1% from a savings account or a term deposit these days if you’re lucky, so your credit card debt is really someone else’s extremely lucrative investment.

If anyone who has a credit card balance outstanding feels like being generous to the ASX banks like Commonwealth Bank of Australia (ASX: CBA), then go ahead and ignore this debt.

But otherwise, just know that you’re being taken to the cleaners.

That’s why I think credit cards should be avoided in 2020. They encourage you to spend more money than you otherwise would and charge you for the privilege if you don’t pay them back on time.  

Unless you are vigilant with your ‘points’ or cashflow strategy and endeavour to pay off any balance without incurring interest charges, credit cards are bad news all round in my view.

So if you don’t want to become someone else’s investment, live below your means, save money and invest in ASX shares. That’s the best way to turn the tables in my view!

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Motley Fool contributor Sebastian Bowen owns shares of American Express. 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.

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