3) Personal Finance Friday: A Guide To Credit Cards

A credit card is like a Swiss Army knife in the financial toolkit – versatile and handy, but if used recklessly, potentially hazardous.

With a single swipe, doors of opportunity swing open; you can essentially buy anything with it.

However, it’s crucial to fully understand this tool in order to harness its benefits without being ensnared in its trappings.

I remember chatting to a friend a while ago about their credit card issues. They had signed up to getting a credit card because they heard the card had good reward schemes.

And it did. They do.

That’s what the advert that sells the credit card to you will emphasise.

But what this friend didn’t realise, was that if they didn’t pay off their credit debt in full each month, they would get charged insanely high interest rates and quickly be in a debt-hole.

And because they didn’t realise this, they spent recklessly on the card in their early 20s.

They went out, booked flights, bought takeaways and spent on clothes, shoes and bags.

They lived the life!

But month to month they wouldn’t pay the debt off in full.

They didn’t really understand that they needed to. It wasn’t overly clear on the credit card app.

So they were blissfully unaware.

And now, in their late 30s, they are still paying the debt off. 

The same money that could be spent on a house, a child, a holiday, or invested towards a rainy day fund is being spent on absolutely nothing.

It’s just paying off debt accumulated through insanely high interest rates.

It’s a bit of a dark tale, I know. But it’s tragically common.

So, I hope this lesson makes you want to read on, learn and to avoid this situation.

If you’re in this situation, then hopefully you’ll want to read on, learn and get out of it.

Either way, here is how to use a credit card properly.

1. Understanding the Borrowing Bridge

In essence, using a credit card means borrowing from your future self. 

The dinners, the gadgets, the holidays – all these are advanced payments against your future income. 

When you get your salary or paycheck, remember, a portion of it is already spoken for by your past self in credit card debt. 

The funds to offset your credit card balance aren’t conjured out of thin air; they’ll come straight from your future earnings.

It’s not magic money.

2. The Alluring and Alarming Power of Compounding

Most of us are acquainted with the magic of compound interest when saving or investing. 

Compound interest is when you earn interest on top of the interest you’ve already accrued. 

Hence, compounding the effect of the interest.

If you aren’t familiar, this graph is basically all you need to know about how powerful compounding can be.

But, like fire, this force can warm your house or burn it down. 

With the very high-interest rates attached to credit cards, any outstanding balance can spiral, turning what once was a manageable amount into a daunting debt.

Instead of that graph showing you income from an investment, imagine it is the compounding of your debt.

Which is what makes credit card debt so dangerous.

So, compounding is a major reason why you can’t allow yourself to be in credit card debt.

3. Psychological Strings: Instant Gratification vs. Long-Term Strain

Credit cards brilliantly cater to our innate desire for instant gratification. 

That immediate approval beep of a spend is like a dopamine hit, affirming our purchase. 

It’s exciting, yes. And it’s fun.

However, this fleeting moment of satisfaction can lead to prolonged financial stress if not managed correctly. 

The psychological weight of debt, month after month, will be far more of a burden than the temporary joy of an impulsive buy.

I can tell you that’s true from my friend; they regret building up their credit card debt so much. 

So much.

Those good times in their 20s simply weren’t worth the pain of being in debt for the next 20 years and sacrificing things they wanted.

They can’t live the life they want now and won’t be able to for some time until their debt is cleared.

Believe me, don’t do it. It’s not worth it.

4. The Silver Linings: Benefits of Credit Cards

Not all is doom and gloom in the world of credit cards of course. 

Indeed, I own one and enjoy the benefits I get from it (I have the Amex silver cashback one, for those wondering).

So if you’ve read the above and think you’re disciplined and informed enough, credit cards can offer:

• Cashback & Reward Points: Earn as you spend on things you are spending on normally anyway. Over time, these rewards can be significant.
• Building Credit Score: Regular usage and timely payments can help bolster your credit score, which is important when applying for loans or mortgages.
• Financial Confidence: When handled wisely, credit cards can be instruments of empowerment, teaching you discipline and money management.

But if, and only if, you pay the debt off in full every month and don’t allow debt to build.

If you only take one thing away from this article make it this: you must pay your debt off in full every month. In full!

You cannot just pay the ‘minimum payment’ amount on your credit card. This will still put you in debt.

5. Navigating the Credit Card Landscape: Tips & Tricks

If you’re new to the credit card realm or looking for ways to optimize your usage, consider these pointers:

1. Card Selection: It’s not one-size-fits-all. From travel benefits to cashback, different cards cater to various needs. Do thorough research and choose one aligned with your spending habits.
2. Commitment to Full Payment: This cannot be stressed enough – always, always pay your bill in full each month. It’s the most effective way to enjoy the perks without drowning in interest.
3. Monthly Ritual: Dedicate time to go over your statement. Scrutinise for any discrepancies and budget for the upcoming payment.
4. Understand Your Card: Keep abreast of your card’s interest rates. Also, be aware of any annual fees, foreign transaction fees (these are usually extortionate so don’t use a credit card abroad – use a debit card like monzo), or benefits that come with your card.
5. Automate Payments: To ensure you never miss a due date, set up an automated payment system. Even if you prefer manual payments, having this as a backup can be a lifesaver.
6. Monitor Your Rewards: Regularly check your reward points or cashback balance. Use them wisely and remember they should be a pleasant bonus, not a reason for unnecessary spending.

Conclusion

In the labyrinth of modern finance, a credit card can be your ally or your adversary. 

If you approach it with respect, understanding, and discipline, it can become a powerful tool for convenience and benefits. 

But, wield it thoughtlessly, and its snares can be long-lasting and painful. 

Like any tool, its utility is determined by the hands that hold it. 

So, swipe smartly, spend wisely, and let your credit card be a bridge to opportunities, not a path to pitfalls like it has been for so many.

Love, as always,

Max

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