Get rid of the little plastic swipe cards
If you’re serious about getting ahead financially, there’s no place for a credit card in your wallet.
Credit cards are firmly entrenched in our daily lives. Reserve Bank statistics show that in December 2016, Kiwis owed around $6.4 billion on personal credit cards, of which $3.9b (about 60 per cent) was incurring interest.
While bank deposit and mortgage interest rates have dropped significantly over the past 10 years, interest rates on credit cards still average somewhere around 20 per cent and even the socalled ‘‘low rate’’ cards charge more than 13 per cent interest.
Despite this, it seems we are hooked on credit.
Credit card providers will argue their interest rates are high because the debt is unsecured, but it seems that high interest rates have little impact on how much debt we incur.
There is little incentive, therefore, for credit card companies to lower the cost of credit to increase their market share; we will spend regardless of the cost. Quite simply, the more we spend; the more profit they make.
There are a number of reasons why people are tempted to use credit cards:
To earn points or rewards with their card spending;
Because they aren’t able to live on their income;
For convenience or for online purchases;
As a ‘‘just in case’’ means of payment, for unexpected expenses or when travelling;
To buy on impulse or to live beyond their means.
Not one of these reasons makes good financial sense.
The value of points and rewards earned on credit card purchases is easily exceeded by the negative impact of uncontrolled spending.
The problem with putting all or most spending on a card is that it becomes nearly impossible to monitor spending on nonessentials such as entertainment, impulse buys, gifts and so on.
The best way to manage money is to have separate accounts for different types of spending, especially for non-essential items.
If you are in a situation where you need to use a credit card to purchase essential items because you are not able to live on your income, then it is unlikely that you will have sufficient funds to pay off your debt.
The monthly repayments will simple worsen your overall financial situation. A better solution is to get budgeting advice.
For online purchases, banks now offer debit cards which can be used in the same way as credit cards online. The difference is that funds are taken straight out of the bank account linked to the card. This is a convenient way of shopping online without incurring debt.
The best solution for emergency funds for unexpected expenses is to have around three months of living expenses in a bank account so you don’t need to rely on credit.
If you have a mortgage, some banks offer an offset facility so your savings will offset the amount of your mortgage for interest calculations. That way, you will keep your mortgage interest payments down. It does, however, take discipline to build and maintain your savings.
Impulse buying is a huge problem, and if there is one thing an impulse buyer shouldn’t have, it is a credit card!
Spending money you don’t have is a sure way to fall behind financially, but the emotional highs from overspending are addictive and it’s a hard habit to kick.
If you are serious about achieving financial goals, credit cards have no place in your wallet.
If you really can’t do without one, don’t use it for non-essential spending; use cash instead. Set a low credit limit on your card and have it paid by direct debit every month.
That way, you win and your credit card provider loses.
Liz Koh is an authorised financial adviser and author of Your Money Personality: Unlock the Secret to a Rich and Happy Life, Awa Press. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847.
Spending money you don’t have is a sure way to fall behind financially, but the emotional highs from overspending are addictive and it’s a hard habit to kick.