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Should I Get a Credit Card?
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Thinking about getting a credit card?
Credit cards can be a great tool to improve your cash flow. They’re convenient and contactless, but they do have their downfalls.
Applying for a credit card can be exciting especially if you’ve never had one before. Nothing feels more adult than tapping a piece of plastic with your name on it before walking away with bags of goodies. It’s only until the bill arrives at the end of the month that the reality sets in. In fact, credit cards are only beneficial if you pay them off religiously at the end of each month. So, if you’ve asked yourself ‘should I get a credit card,’ we’ve got the pros and cons to give you a good idea.
The pros of credit cards
Opening a credit card in your name means you have access to a revolving line of credit. Essentially this is money that’s not yours but is at your disposal when you need it. Every month you’ll be given a predetermined credit limit by the bank. Consider this as the maximum amount you can spend on your credit card during the month.
Although a lot of people consider them a debt trap, having that additional payment option in your pocket has it’s advantages. We’ve listed a few of these below.
Credit cards can be a great way to get handy rewards. That’s why even people with funds in their savings account choose to use credit cards. Credit card rewards are quite extensive. The list of rewards you can earn on your credit card include cash-back, frequent flyer points, merchandise and other ‘exclusive offers.’ You can find out the full extent of rewards offered directly from credit card providers.
Build a credit history
Another reason to open a credit card is to build and maintain a good credit history. This is, of course, if you haven’t already done so. Without a track record to go on, you’ll be considered a higher risk when it comes to taking out a car loan or a home loan. Lenders want to see you have a history of making reliable repayments. Repayments, whether it be on your credit card or phone bill act as a good indicator of future performance.
Your credit card repayment history is reported to the large credit reporting bureau’s each month. This will therefore play a role in calculating your credit score. In order to be seen as a reliable borrower, you need to demonstrate that you can pay your bills on time. This will also reflect positively on your credit score.
To check your credit score, you can access free annual credit report from the following credit reporting bureau’s:
Can help you make big purchases
For large one-offs purchases, like plane tickets, a credit card can give you access to funds that you normally wouldn’t have. Or maybe, you need help covering an emergency expense. Instead of applying for a loan, credit cards can be particularly helpful in these situations. Just remember, that you will need to pay this off at a later stage. Therefore you need to make sure it’s within your budget.
Dangers of using a credit card
You’ve probably heard horror stories of people racking up $30,000 debts on the credit cards. Although these are extreme instances, credit cards can be dangerous for a multitude of reasons. So if you’re still deciding on whether or not to get a credit card, these are things you should keep in mind.
Easy to impulse buy
In today’s world, almost everything is at our fingertips. There is always temptation to buy something new. Whether you’re heading out of the house, or scrolling through your Facebook feed, it’s so easy to pull out the plastic and make an impulse purchase. The danger here is that you might not have the funds to cover these expenses at the end of the month. Or at the very least repaying these purchases will throw off your budget.
Science shows that buying something new produces a greater amount of dopamine, otherwise known as the ‘feel good transmitter.’ Credit cards can be dopamine inducing because they remove the pain from paying. In other words, credit cards can make you spend like a Kardashian, rather than someone with a modest bank account.
It’s not free money
Despite the added convenience of having another payment option in your pocket, credit cards are definitely not free money. Credit cards come with interest rates ranging from 7.99% to 23.5%. Not to mention there are a number additional fees and charges as well. If you don’t stay consistent with your repayments, you could have a large debt hanging over your head before you know it. So if you’re someone who isn’t great at repaying debt (e.g phone bill, utilities bill, your mates lunch shout), a credit card probably isn’t for you.
Paying the minimum monthly repayment on your credit card isn’t a financially viable option. A lot of people think that because they’re repaying their card card debt, even if it isn’t much, that they’re doing enough. Here’s an example of why you shouldn’t do this: If you pay your minimum of $126/month on your debt that’s $6,240, it will take you over 38 years to pay off the debt in full. Not only that but you’ll end up paying almost triple the original amount because of the extra interest charged on top.
To claim rewards you have to spend big
If you’re not a big spender, claiming rewards for credit cards is quite hard. If you spend the average annual spending level of $24,000/year on your credit card, you’re really only just breaking even on many rewards programs. When you take into account the annual fee you’ll need to pay, then you’ll most likely be going backwards!
4 ways to pay off your credit card faster
Having credit card debt hanging over your head can be extremely stressful. Paying the minimum repayment each month will not only take you a very long time, but it also means you’re paying more in interest. Check out this Jacaranda Finance guide below to paying your credit card debt and to moving toward a financially free future.
- Make payments on time: This is crucial. You should consistently check your credit card statement so that you’re aware of your payment due date. Set reminders to ensure you make payment on or before this date. This will also reflect positively on your credit score.
- Pay off as much as you can every month: Depending on your situation, it might be a good idea to put more money towards repaying your credit card debt. If you get a tax return or a bonus from your job, you can put some of this towards your debt.
- Reduce your credit limit: This is a good way to ensure you don’t overspend or impulse buy. By having less funds available to you, the more frugal you’ll need to be with your credit card. You can reduce your credit limit by calling your credit provider (bank), going online, or visiting a branch.
- Shop around for a better deal: If you must use a credit card, you should do your research and shop around for a better deal. Look for cards with the lowest interest rate and fees, rather than the card with the best rewards.
What about personal loans?
Have you decided on whether or not a credit card is right for you? If you’ve decided it isn’t, there other alternatives that might better suit your individual and financial circumstances. You can apply for personal loans as a short term solution to your cash flow problems. Jacaranda Finance offers personal loans ranging from $300 to $10,000 and can be repaid over a period of 12 to 24 months. To apply, you can scroll up to the top of this page to begin your application. The best part? If you apply during business hours, you could have the cash in your account by the end of the day.
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