A credit card is a way of lending money from banks and financial institutions. They give you a piece of plastic with a card number and your name on it and you can use it to pay for goods in shops and online. At the end of each month you pay all that money back to the credit card company.
If you pay less than the full amount owed they will charge you interest (a % of the outstanding balance) on the amount that is still left to pay. The rate of interest, depends on the card company and can be very very high indeed so think carefully before you get into a contract with the credit card company.
Should I get a credit card?
Deciding if you should get one depends on a lot of different factors, these could include:
- Why do you want one? Is it for spending on things you don’t need or will it be a short term solution to paying for practical expenses?
- Are you good with money or a spend thrift?
- How is your credit rating?
- Are you debt free and need to up your credit score?
- Will you be able to pay the full balance as soon as it comes due?
There is much debate about whether or not credit cards are good or bad, the answer is simply that they are both – it all depends on how you handle them.
Are credit cards good?
Lets look at a few scenarios of how this might play out, a case study if you will.
If you are the kind of person who takes the free or low cost money from a credit card AND invests or uses the money to make MORE than the debt cost, then getting a credit card is a good idea.
IF however you are the type to spend the money on stuff you probably don’t need, and will have nothing left in the bank by the end of the month and will no doubt be left paying high interest charges every month to the credit card companies, then NO, getting a credit card is a very very bad idea.
I personally love credit cards. Yes, I probably should get out more but hear me out.
If you manage your cards properly, they can be very useful in a number of ways:
- Build up your credit rating
- Cash back on spend
- Cheap loans
- Help with cashflow
- Enable savings and investments
I use my cards in 2 ways, the first is to manage longer term debt (I’ve actually use some to bring down my LTV on my mortgage) and the second for day to day spend.
We will however start our little case study by looking at how most people [statistically speaking] use their cards.
Credit Card Case Study
For this example we are going to follow the not so exciting adventures of Bob.
Bob has a “good job”; he earns £/$ 50k per year and has a normal credit card from his bank.
The card does not give him any special benefits and if there is an unpaid balance at the end of the month, he pays 24.9% pa interest.
Can I just say at this point NEVER leave an unpaid balance on a card that is charging interest! ALWAYS pay in full!!
Anyway, this is what Bob’s card statement might look like over the year;
| Date | In | Out | Balance | Notes |
| 01/01/2021 | -£/$1,569.23 | Balance carried over | ||
| 05/01/2021 | £/$420.00 | -£/$1,989.23 | spend | |
| 10/01/2021 | £/$120.00 | -£/$2,109.23 | car insurance | |
| 15/01/2021 | £/$31.38 | -£/$2,077.85 | Payment | |
| 30/01/2021 | £/$32.56 | -£/$2,110.41 | interest | |
| 02/02/2021 | £/$420.00 | -£/$2,530.41 | spend | |
| 15/02/2021 | £/$350.00 | -£/$2,180.41 | Payment | |
| 28/02/2021 | £/$43.79 | -£/$2,224.20 | interest | |
| 01/03/2021 | £/$580.00 | -£/$2,804.20 | spend | |
| 10/03/2021 | £/$200.00 | -£/$2,604.20 | Payment | |
| 30/03/2021 | £/$46.15 | -£/$2,650.35 | interest | |
| 01/04/2021 | £/$250.00 | -£/$2,900.35 | spend | |
| 10/04/2021 | £/$550.00 | -£/$2,350.35 | Payment | |
| 30/04/2021 | £/$54.99 | -£/$2,405.34 | interest | |
| 02/05/2021 | £/$400.00 | -£/$2,805.34 | spend | |
| 05/05/2021 | £/$720.00 | -£/$3,525.34 | holiday | |
| 11/05/2021 | £/$200.00 | -£/$3,325.34 | Payment | |
| 31/05/2021 | £/$49.91 | -£/$3,375.26 | interest | |
| 02/06/2021 | £/$320.00 | -£/$3,695.26 | spend | |
| 11/06/2021 | £/$650.00 | -£/$3,045.26 | Payment | |
| 30/06/2021 | £/$70.04 | -£/$3,115.29 | interest | |
| 03/07/2021 | £/$560.00 | -£/$3,675.29 | spend | |
| 12/07/2021 | £/$62.31 | -£/$3,612.99 | Payment | |
| 30/07/2021 | £/$64.64 | -£/$3,677.63 | interest | |
| 03/08/2021 | £/$700.00 | -£/$4,377.63 | spend | |
| 12/08/2021 | £/$350.00 | -£/$4,027.63 | Payment | |
| 30/08/2021 | £/$76.31 | -£/$4,103.94 | interest | |
| 03/09/2021 | £/$390.00 | -£/$4,493.94 | spend | |
| 12/09/2021 | £/$82.08 | -£/$4,411.86 | Payment | |
| 30/09/2021 | £/$85.16 | -£/$4,497.02 | interest | |
| 04/10/2021 | £/$550.00 | -£/$5,047.02 | spend | |
| 13/10/2021 | £/$350.00 | -£/$4,697.02 | Payment | |
| 30/10/2021 | £/$93.31 | -£/$4,790.33 | interest | |
| 04/11/2021 | £/$400.00 | -£/$5,190.33 | spend | |
| 13/11/2021 | £/$300.00 | -£/$4,890.33 | Payment | |
| 30/11/2021 | £/$99.40 | -£/$4,989.73 | interest | |
| 05/12/2021 | £/$800.00 | -£/$5,789.73 | spend | |
| 14/12/2021 | £/$99.79 | -£/$5,689.94 | Payment | |
| 31/12/2021 | £/$103.54 | -£/$5,793.47 | interest |
| 0% on Purchases Credit card | ||||
| Date | In | Out | Balance | Notes |
| 01/01/2021 | -£/$1,569.23 | Balance carried over | ||
| 05/01/2021 | £/$420.00 | -£/$1,989.23 | spend | |
| 10/01/2021 | £/$120.00 | -£/$2,109.23 | car insurance | |
| 15/01/2021 | £/$31.38 | -£/$2,077.85 | Payment | |
| 02/02/2021 | £/$420.00 | -£/$2,497.85 | spend | |
| 15/02/2021 | £/$41.56 | -£/$2,456.29 | Payment | |
| 01/03/2021 | £/$580.00 | -£/$3,036.29 | spend | |
| 10/03/2021 | £/$49.13 | -£/$2,987.16 | Payment | |
| 01/04/2021 | £/$250.00 | -£/$3,237.16 | spend | |
| 10/04/2021 | £/$59.74 | -£/$3,177.42 | Payment | |
| 02/05/2021 | £/$400.00 | -£/$3,577.42 | spend | |
| 05/05/2021 | £/$720.00 | -£/$4,297.42 | holiday | |
| 11/05/2021 | £/$63.55 | -£/$4,233.87 | Payment | |
| 02/06/2021 | £/$320.00 | -£/$4,553.87 | spend | |
| 11/06/2021 | £/$84.68 | -£/$4,469.19 | Payment | |
| 03/07/2021 | £/$560.00 | -£/$5,029.19 | spend | |
| 12/07/2021 | £/$89.38 | -£/$4,939.81 | Payment | |
| 03/08/2021 | £/$700.00 | -£/$5,639.81 | spend | |
| 12/08/2021 | £/$98.80 | -£/$5,541.01 | Payment | |
| 03/09/2021 | £/$390.00 | -£/$5,931.01 | spend | |
| 12/09/2021 | £/$110.82 | -£/$5,820.19 | Payment | |
| 04/10/2021 | £/$550.00 | -£/$6,370.19 | spend | |
| 13/10/2021 | £/$116.40 | -£/$6,253.79 | Payment | |
| 04/11/2021 | £/$400.00 | -£/$6,653.79 | spend | |
| 13/11/2021 | £/$125.08 | -£/$6,528.71 | Payment | |
| 05/12/2021 | £/$800.00 | -£/$7,328.71 | spend | |
| 14/12/2021 | £/$130.57 | -£/$7,198.14 | Payment |
I’m assuming here that dear Bob is using his card for general living expenses, he’s paying off chunks when he feels like he ought to or is able to and is just paying the minimum when he’s a bit strapped for cash.
You don’t have to be a mathematical genius to see that he’s not only managed to amass a decent amount of debt over the year which is now costing him over £/$100 per month just to stay in the same place, but he’s also spent £/$819.81 on interest!! That’s more than his summer holiday cost!
I won’t labour this point, I’m sure you get this, just please;never leave an unpaid balance on a card that’s charging you interest, even if you use the card to survive next month, still pay it in full.
You get at least 21 days interest free (check the back of your credit card statement to find out how many days interest free it gives you or call them) so it’s always worth it.
Why are credit cards bad?
One of the reasons that most money books recommend NO DEBT at all is because people often see this interest free period and think its free money which makes them spend more than they would have if it was cash and then they don’t PAY IN FULL when the payment date rolls around. I’m going to continue with this article in the hope that you are not most people!
What he could have done differently especially if he knew that he’d be having a tough year and wouldn’t be able to pay for it all, would be to get a card that’s 0% on purchases.
These are especially good if you’re buying something quite big like a car (a used cheapish one of course) or a special holiday etc. just to be clear though this is money you would have spent anyway, it’s not free cash to spend on stuff you wouldn’t buy if you had to hand over cash.
0% purchases cards need to be treated with care. It can feel like you’re rich for a while since all the money you would have spent is still in your bank account, but you have to put the money away somewhere where you won’t touch it so that you can pay the debt off when it’s due. Always try to keep the balance on the asset side of the scale
Maybe Bob could have done something like this instead:
In this example, Bob has spentexactly the same moneybut only paid the minimum payment as he is not being charged any interest. The rest of the money that he would have paid in (in method 1) goes into a savings account:
| Savings with credit interest at 5% | |||
| 15/01/2021 | £/$0.00 | £/$0.00 | Payment |
| 15/02/2021 | £/$308.44 | £/$308.44 | Payment |
| 28/02/2021 | £/$1.29 | £/$309.73 | Interest |
| 10/03/2021 | £/$150.87 | £/$460.60 | Payment |
| 30/03/2021 | £/$1.92 | £/$462.52 | Interest |
| 10/04/2021 | £/$490.26 | £/$952.78 | Payment |
| 29/04/2021 | £/$3.97 | £/$956.75 | Interest |
| 11/05/2021 | £/$136.45 | £/$1,093.20 | Payment |
| 29/05/2021 | £/$4.55 | £/$1,097.75 | Interest |
| 11/06/2021 | £/$565.32 | £/$1,663.08 | Payment |
| 28/06/2021 | £/$6.93 | £/$1,670.01 | Interest |
| 12/07/2021 | £/$27.08 | £/$1,642.93 | Payment |
| 28/07/2021 | £/$6.85 | £/$1,649.77 | Interest |
| 12/08/2021 | £/$251.20 | £/$1,900.98 | Payment |
| 27/08/2021 | £/$7.92 | £/$1,908.90 | Interest |
| 12/09/2021 | £/$28.74 | £/$1,880.16 | Payment |
| 26/09/2021 | £/$7.83 | £/$1,887.99 | Interest |
| 13/10/2021 | £/$233.60 | £/$2,121.59 | Payment |
| 26/10/2021 | £/$8.84 | £/$2,130.43 | Interest |
| 13/11/2021 | £/$174.92 | £/$2,305.35 | Payment |
| 25/11/2021 | £/$9.61 | £/$2,314.96 | Interest |
| 14/12/2021 | £/$30.78 | £/$2,284.18 | Payment |
| 25/12/2021 | £/$9.52 | £/$2,293.69 | Interest |
The money that goes in or out of the savings account is exactly what he would have paid into the card in method 1 so his monthly payments areexactly the samein both examples, they are just going to 2 accounts instead of 1.
You will also see that he is RECEIVING interest instead of paying it (nice feeling!)
Comparing to result of these 2 methods look like this:
| Method 1: normal credit card | Total pd out in 2021 | £/$3,225.56 |
| Total interest charged | £/$819.81 | |
| total Debt at the end of the year | -£/$5,793.47 | |
| Method 2: 0% and savings | total pd; Credit card | £/$1,001.09 |
| total paid into savings | £/$2,224.47 | |
| Total paid out in 2021 | £/$3,225.56 | |
| interest received | £/$69.22 | |
| total debt at the end of the year | -£/$4,904.44 | |
| Difference in methods – saving of: | £/$889.03 |
In the second method bob is £/$889.03 better off at the end of the year. He paid in the same amount and spent the same amount but he’s in much less debt. Not only did he save all the interest he would have paid, but he MADE some too!
The other really important thing is that this is only the first year picture; imagine if this went on for YEARS!! All that interest would just get higher and higher making it almost impossible to crawl out of. Similarly, in the second method you compound the interest that you RECEIVE for as long as you can keep this balance on 0% by paying the monthly minimum.
Should I pay off debt or save?
There is also a really crazy thing that people sometimes do, I’m sure this isn’t you but I’ll tell you anyway, some people put money into savings (at very low rates usually) and leave a balance on their credit cards!! They pay for debt when the money is sitting in the bank “just in case”!!!! really?! Just in case of what? That someone tries to rob you blind by charging you interest every month?!
I’ve built a calculator HERE that you might want to have a play with if you still think that saving is better than pay off debt.
If you have money in a savings account, check out the rate you are getting (it’s probably less than1%), if it’s less that the rate you are paying your credit card (probably more than 18%), pay the damn thing off asap!
I really hope that this has helped you decide if you should get a credit card or not, but if you are still in doubt I would probably stick with not getting one until you are sure WHY you want one and that it will be used for all the right reasons and none of the wrong ones.
Getting any kind of loan or credit when you are not confident in managing it can very very easily cause you to get into debt that is seriously damaging to your future financial health.
Check out some of our money management spreadsheets and printable to make sure that you have all your finances in order before you make any decisions.
