If you’ve been asking yourself ‘should I get a credit card?’ but still unsure, I’d like to help you come to a conclusion.
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If you’re asking yourself ‘should I get a credit card?’ I’ll assume that you are considering getting your first credit card.
Based on that I’ll briefly explain what a credit card even is.
Credit Cards
A credit card is essentially borrowed money that you have access to through a card. When you spend money on this card you’ve spent part of the borrowed money, which you have to pay back.
They also come with perks and extras, which we’ll get into later, to make the credit cards attractive. Other credits are designed for people to build their credit scores.
Let’s get into it.
Should I Get A Credit Card?
The first thing you need to ask yourself is why you are thinking of getting a credit card. The answer will help to steer which card suits your needs.
Good alternative to an overdraft or loan
I personally believe credit cards are a good alternative to overdrafts and loans if your reason is borrowing money in the short term. By short term I mean from as a little as 1 week to as long as 1 year.
In our Financial Health Check (below) we talk about financial numbers you should know, and one of those is how much you live on.
When the amount you live on is more than your income you should do something about it. But there may be times when you are in need of a buffer.
Generally speaking, overdrafts are great because they sit on your account and can be paid back anytime.
The downside is that you are charged fees immediately from the moment you use it until it is repaid in full.
Loans have a fixed repayment schedule with the minimum term for bank loans being one year. Not really designed for a buffer but for larger purchases or expenses.
Credit cards sit as a great option between these two. You have flexibility like overdrafts but you’re not charged from day 1 like overdrafts.
You have up to 56 days interest free period with credit cards. In other words you have 56 days to pay back what you spend before interest is charged.
Which is pretty good if you need some money to cover you for the next week or even month.
However, credit cards are not for withdrawing money or setting up direct debits. They are for card payments or recurring card payments.
Extra Perks Not on Debit Card
All cards (debit and credit) have a protection system called chargeback whereby you can claim your money back. Covers you if you buy faulty goods, a service wasn’t provided, or the company you bought something from went bust.
You can claim for a chargeback within 120 days from when you made the purchase.
However a chargeback is not a legal requirement, it is purely part of VISA and Mastercard’s service.
Credit cards have an extra layer above this called Section 75, which is a legal protection, and you can claim any time.
This makes me feel safer to use my credit card when shopping online or paying for my holiday in case something happens.
Other perks credit cards, known as Reward Credit Cards, come with cashback offers or airline points built up. In order for you to get these benefits you have to spend money on the card.
Build Credit Score
Most of us probably made mistakes and we find ourselves with all sorts of issues on our credit file. I remember I had issues with getting a phone contract because my score was that bad.
I used a credit card to improve my credit score.
Credit cards are a great tool to use to build your credit score, if used right!
This is because your credit score is about how good you are at managing your borrowed money. If you pay back your debts on time you have a good score, if not you have a bad score.
Borrowing money in the form of a credit card and paying it off, is a good way to improve your score.
Learn Money Management
I’ll be honest there was something about getting my first credit card that made me feel grown up. It was somewhat scary and exciting all at the same time.
I would argue that the best way to learn anything is by doing it. I learnt how to manage debts and repaying money by having something that demanded money from me.
There are other ways you can do this like getting a phone contract or a bill. I liked the idea of being flexible about how I use it and when I pay it back.
Credit cards are a great starting point to teach about managing your money and paying back your bills. You you have to plan ahead how you are going to repay, and this is a key financial skill!
One of my money tips for younger young adults is to grow your knowledge about money and how things work. A credit card is also a good way to start.
However I would advise you first learn how to budget! This is the foundation of money management.
We encourage you to take the simple action of performing a Financial Health Check using our FREE guide below. There are 4 financial numbers you should know about your finances and a couple of these numbers will influence your financial strategy.
The ugly side of credit card
So, my first credit card had a maximum limit that I could spend of £250.
At first I was so cautious I only used it for snacks and smaller purchases but eventually I got brave. Too brave for my own good. I owed all the £250 at one point and couldn’t figure out how.
One word: INTEREST!
This is the one ugly thing about credit cards that make people conclude that credit cards are bad.
For me it’s all about learning how to play the game and following the rules.
The credit card rules are if you spend money and pay it all back in time, there’s no interest charged. If you don’t pay it all back in time, you’ll be charged interest.
Interest is charged on credit cards every month based on how much you owe each month. This is how it adds up.
This happens when you don;t pay back the credit card in full every month.
This can turn all the benefits I mentioned above to be worthless if you let debt grow.
If you ever find yourself in this situation, it is possible to pay off your credit card debt.
Your Money Mindset
Your mindset about money is ultimately the most important factor of all!
This is why it’s important to ask yourself why you want a credit card. This will let you know what your mindset is.
A ‘buy now and pay back later’ mindset means you’re more likely to find yourself in debt.
Credits cards are not a permission to go on a shopping spree you cannot afford
If you’re going to get a credit card, do it the right way. Learn to budget!
If your mindset is to only spend the money you have, then credit cards are a great addition to your arsenal.
When you want something to cover you in the short term because something came up unexpectedly, then credit cards a good option too. Although we highly recommend building up savings for this!
Ultimately, it’s all about your mindset as to whether credit cards will be a great tool or a debt for you.
Take Action
Has this helped you?
Get a credit card or not, make the decision. If you’re getting it, make sure you have a budget first.
Share this with your friend, family, or partner if they are also thinking about getting a credit card.
Download our Free Financial Health Check to give you a good overview of your financial health.
Let us know how you’re getting along by getting in touch with us, we’d love to hear from you
Knowledge is powerless without action
So take action, and take care
Thando