Credit when it’s due: pros and cons of plastic
Who hasn’t whipped out their credit card for that impulse buy or big-ticket item? We consider the pros and cons of paying with plastic.
For many of us, credit cards are the easy payment and borrowing tool we like to have in our back pocket. From the simplicity of contactless payments to the goodies offered by rewards schemes, their enduring usefulness has ensured their ongoing survival.
But does the average Australian really need a credit card?
The obvious flipside to the convenience of a credit card is the debt accrued on unpaid balances.
Data from the Australian Bureau of Statistics shows the most common form of debt is credit card debt, held by 55% of households. The Australian Securities and Investment Commission puts the national credit card debt at $32 billion, or $4185 per card holder.
Debt may be a dirty word to many, but it can also be beneficial. It helps people smooth out expenditure over a longer period and to make big, one-off purchases they cannot make from their income alone.
But Mercer’s strategic financial adviser, James Wheatley, says there are other ways to manage these costs.
“There’s an argument that if people use credit cards properly they are cash-flow tools because a lot of expenses people incur are yearly, such as car insurance and registration,” he says. “But we recommend people have a cash reserve of $5,000 or $10,000 for these expenses.”
Greater competition among credit card providers has seen many offering promotions including interest-free periods, incentives for paying the balance in full by the due date, and balance transfer options. They have also reworked rewards schemes, throwing in extra perks such as cash-back incentives, gift vouchers and movie tickets.
Credit cards also allow consumers to get by without needing to visit the ATM, and can provide leverage when it’s most needed. The trick is managing debt with a watchful eye on the future and a firm rein on expenses.
Debt needs to be serviceable in the event of interest rate rises, job loss, illness or injury, or a drop in property prices. Users should also be aware of terms and conditions to make sure they are eligible for reward deals and, whenever possible, pay the full balance at the end of the month.
But the fact remains that debt accrued by credit card interest is the worst kind, Wheatley says.
“Credit cards are really the last resort, and that’s why they’ve got the highest interest rate – they’ve got the highest risk in terms of people being able to pay them off,” he says, “I don’t think credit cards are a long-term solution to building wealth because the interest rate you’re paying at 15% to 20% is way above any kind of return you would get from any kind of investment or business.”