Mar 16, 2018  | Tags: credit, debt reduction tips

Our Insights ...

Credit cards are shiny and alluring emblems of instant gratification. When you take out a credit card, you may feel like patting yourself on the back for being an adult who’s 'building credit' and earning airline points.

Opening a line of credit is a personal loan; it’s unsecured, easy and often started with the best of intentions.

But if you’re not using a credit card responsibly, you may simply be trying to justify the fact that you have poor spending habits and self-control.

Credit spending can quickly spiral out of control. It’s an immense responsibility and not for just anyone.

Here few reasons to think twice before applying for your first or next credit card ... or even to cut up your current one.

1. Interest is sucking your wallet dry

The typical credit card in Australia packs a 15-20% interest rate. This means that you’re likely shelling out hundreds of dollars per month just for the privilege of owing someone money.

Getting rid of credit card debt ASAP or avoiding it altogether will potentially save you thousands each year.

2. You’re less likely to make smart spending decisions when armed with a credit card

When you don’t see the money actively leaving your bank account, it’s easier to make those ‘well, why not?’ kind of decisions. If it doesn’t feel like your own hard-earned money, you’re going to end up spending on too many drinks, unhealthy foods, non-essential clothing items etc. 

Cash in-hand feels valuable. Its worth is concrete. When you pay in cash, you’ll find yourself being more conscious, seeing how far you can stretch a dollar. You’ll probably make healthier choices for your family, too. 

3. You don't really need credit for an emergency 

It’s easy to say you just keep a credit card handy for ‘emergencies’. But that’s a trap since just having it will make you prone to classify many unnecessary purchases as ‘emergencies’.

Besides, there are far cheaper and more reasonable ways to pay for actual emergencies. Medical treatment, for example, may be an unexpected expense. But there are often many other ways to afford the care other than a credit card. Medical facilities often have arrangements for convenient payment plans that incur far less interest than a credit card balance will. 

4. 'Building credit' is an illusion

Some people like to think that 'building credit' is a good thing and that even having some debt is a positive.

That’s not true when it comes to credit cards, however. Credit card debt is bad debt, period.

What’s the point of building credit with a card, anyway? Its ultimate aim is to let you take out even larger loans in the future. But that just equals incurring more debt. Spending borrowed money works against the principle of building wealth, it’s as simple as that.

‘Building credit’ is a virtually useless benefit if you’re often spending money that’s not yours.

5. There are often hidden fees

Credit cards are made out to be a convenience. But that’s a convenience you’ll pay through the nose for.

Your credit card company may let you miss payments or make late payments for the sake of ‘convenience’. But there will be special fees added on for such provisions, guaranteed.

By maintaining a line of personal credit, you’re likely to pay out more in fees than you realise. That’s all on top of the interest rates.

Already feeling stuck with credit card debt and don't know what to do next? Read part 2.

Take back control of your spending by cutting back (or cutting up) on using your credit card. Talk to a financial expert here at Calder Wealth Management to learn how.

To get smart about your finances, talk to the team at Calder Wealth Management. Call us on (08) 8373 3333 to schedule your appointment.

Written by Ben Calder, Private Client Adviser at Calder Wealth Management.