Why a good, low-fee card can be a bonus for your credit rating

Dave’s son only uses cash and doesn’t have any personal debt or loans

QG’day, Paul. I was having a conversation about all things financial, including personal credit ratings, with my eldest adult son the other day and was not sure what advice to give him, or indeed my other son. My son (25) is living away from home (with no assistance from the bank of mum and dad) at university and has a part-time job.

He has around $20,000 in emergency savings, and he has also started some small investments in exchange traded funds. He has never had any personal debt, loans or credit cards of any kind, and has always only spent money that he physically has.

When the conversation turned to building his credit rating for the future, I suggested that he may want to think about applying for a credit card. This was somewhat of a difficult piece of advice for me to give, as I didn’t want to encourage the use of credit if it wasn’t required, and he was not overly keen as he sees no need for one. At present his recurring bills are rental expenses, mobile phone, internet and insurance, including health cover, and all are always paid on time.

Could I please ask your thoughts, given his situation? Should I advocate that he apply for a credit card to assist with building his long-term credit rating, or are there any alternatives?

The answer is ‘yes’ to the credit card, Dave. If you had told me he had $20,000 in debt, no job and so on, we’d be having a very different conversation.

But the reality is that our system relies strongly on at least a transaction card. It’s very handy not just for his credit rating, but also when he travels.

What might amuse him is using one of the search engines to find the best ‘no-fee’ credit cards. With his sense of financial discipline, we both know he will pay it off in full inside the interest-free period and, like me, he will probably enjoy using the bank’s money for free and building up frequent flyer points.

Don’t forget, a good credit card always paid off in full is a no-brainer. I compare it to a club with poker machines. Those who play the pokies pay extra voluntary tax to the State government, fund various community groups and, of course, access low member prices for food. The winners are easy to find – those who use the clubs and avoid thieving poker machines like the plague.

It is the same with credit cards. The sad reality is that we have around $33 billion on cards attracting interest. Those of us who pay off our cards in full with no interest are being subsidised by those who are unable to do so. I get loads of freebies from my card, way in excess of the annual fee I pay.

I am sad that, like a club with pokies, my ‘freebies’ are paid for by pokies losers and I’m sad my credit card freebies are paid for by those with card debt. But all I can do is to suggest that people don’t play pokies and pay off their card in full by the due date, or at least change to a low-rate card.

This is a long ‘yes’ answer, but I see many benefits to your son in getting the right credit card for his purposes.

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