Should I use a credit card?

In the world of personal finance, credit cards have a bad reputation.

It's not surprising.

It’s not hard to find a story of someone that is in crippling credit card debt, just making the minimum repayments and never getting ahead.

And to be fair, used unwisely, credit cards can be dangerous for your financial wellbeing if you don’t take care.

But in the interests of presenting a balanced argument, this article discusses how credit cards may work in your favour and why I personally use a credit card as part of my personal finance journey.

There are several reasons you may choose to use a credit card:

• Rewards points

• Protection and built in insurance

• Savings benefits for offset account users

Reward points

I think this is why nearly everyone starts using a credit card…for the glorious points.

Truth be told, the points aren’t that great and it feels like they are progressively watered down, however, getting something for nothing is a pretty good deal.

Case in point, I personally have never paid credit card interest, nor an annual card fee, but have approximately $1,500 worth of points that can be converted to a gift voucher. All I did was set up the credit card and swipe it whenever I had a chance.

A lot of business owners do this and as businesses are expensive to operate, most operators find it to be a beneficial way to build up some extra points pretty quickly.

Protection and built in insurance

A serious value add when using credit cards is that you are initially spending the money of your credit card company, rather than your own money.

This means when something goes wrong, your credit card company will more aggressively pursue the recovery of the payment than if you had have used a debit card or paid cash.

Over the last 12 months, I’ve had numerous friends and family that have had illegal charges made to their credit card:

• The taxi company that double charged a family member and wouldn’t refund the money;
  

• The unintentional payment to a scam company; and
  

• The unlawful purchasing of expenses online by someone who had somehow accessed the credit card
  

In each scenario, all of these payments were reversed with not much more than a phone call to the credit card provider.

I was impressed.

In addition, credit card companies frequently provide insurance as part of the offering. An example may be built in travel insurance. This can be a real benefit, and I dare say many people may not be aware of this feature.

Remember to carefully read the Product Disclosure Statement to be sure of what insurance is, and is not, provided.

Holding cash for longer to offset home loan

An advanced finance technique is to put all your purchases on the credit card, and pay the credit card off in full at the end of the month.

This strategy works especially well when using an offset account, as you hold extra funds in your bank account for longer, offsetting the interest on your home loan.

An article discussing the benefits of an offset account is available here.

Let’s quantify what this might look like. Let’s say you spend an average of $4,000 per month, and are paying interest at 2.5%.

By having a rolling credit card balance of $4,000 at any given time, you are holding additional funds in your bank account, offsetting your mortgage.

This provides an interest saving of $100 in mortgage interest every year.

I know it doesn’t look like much, but extrapolate that for the life of your mortgage. Over a 30 year mortgage, that's $3,000 saved, just by using a credit card effectively. In reality, more interest is saved as each year less interest is charged on your home loan.

Less interest now, means less interest to pay interest on in the future, so there is a compounding advantage here that helps you repay your home loan that little bit quicker.

Over the life of a mortgage, it might be the equivalent of you paying one or two less mortgage repayments, maybe more.

To help me make the point, imagine that interest rates aren’t at the lowest they have ever been and consider the benefits when interest is say 5% instead. It adds up.

And hey, maybe your rolling credit card balance is much higher than the amount I’ve used in the example.

The best thing to do is quantify it for yourself and see how much this strategy can save you.

Recommendations for using a credit card:

If you are using a credit card, my recommendations are pretty simple:

• Pay off the balance in full at the end of the month, and never pay interest. The interest rates are just too high to justify.
  

• Never spend money you don’t have. It goes without say but this happens all the time, putting people in the cycle of paying interest on credit cards. Just because your credit card allows you to spend $10,000, doesn’t mean you should.
  

• In my opinion it is worth paying the annual fee when this provides an interest free period, reward points and insurance. But generally, if you have a home loan, you can usually negotiate all those benefits without paying an annual fee for the card.
  

• Never only make the minimum repayments. We’ve all seen the warnings showing that if you only make the minimum repayments, it’ll take you 22 years to repay your debt. Seriously, don’t do this. If you are only making the minimum repayments, you can't afford to be using a credit card.
  

• Keep the credit limit manageable. When you are applying for a loan, the credit card limit will be multiplied by four and your borrowing capacity reduced accordingly.
  

• With regards to interest free periods, carefully check whether the interest free period only applies if you are paying the credit card debt in full at the end of the month. Generally, if you are only making the minimum repayments, you won't benefit from the interest free period on any new purchases. Therefore, where you haven't paid in full, it's very likely you are paying interest from day one for new purchases, instead of receiving an interest free period.

I personally use a credit card to manage my finances. I like the reward points, I like the built in protection, and I like that I have an interest free period.

If you have the discipline to not spend beyond your means, and the financial discipline to repay your credit card in full by the due date, credit cards can be a financial tool for benefiting your financial situation.