Nearly all personal finance strategies involve strength, persistence, dedication and time.
Why are credit cards like drugs? They are easy to get your hands on, provide a temporary high, but are bad in the long term and will destroy your life.
Credit cards at their best are fantastic tools for managing cash-flow, minimising interest (not a misprint) and acquiring frequent flyer points. At their worst, credit cards lead the weak in a downward spiral to financial oblivion.
You should only use credit cards if you know you can pay off the balance in full when due.
Let’s look at a situation where a household spends $6,000 on their credit cards each month. If the balance is paid in full from a mortgage account (or preferably offset – will back link in future article), the cost (more opportunity cost in this instance) at current mortgage rates of 4% is $240. If the balance is carried (e.g. one month behind where the balance and the where the interest is charged) at 20% is $1,200 a year. This is a difference of $960.
EVERY SINGLE YEAR OF YOUR ADULT LIFE!
Taking into account compounding and inflation (a couple of my favourite topics) over 60 years is $569,909. OVER HALF A MILLION DOLLARS!
Banks love that you carry a balance on your credit card because the above is the income they receive from a large number of the Australian population over their lifetimes. People love criticising banks over their massive profits.
If you can’t beat them – join them. Perhaps buy some bank shares (unless you think Australian property is overvalued on a range of metrics and Australian banks are holding a ticking time bomb of bad debts if interest rates increase, unemployment increases, wage growth continues to stagnate etc).
Take away points:
1. With discipline, credit cards are an effective interest free tool;
2. You should only have a credit card if you have the cash (or a 100% certain future cash-flow) to pay off the card in full;
3. You should never pay a single cent of credit card interest in your life;
4. You should never pay a single dollar of annual fees (one caveat – if you can acquire masses of frequent flyer points at efficient cents per point rates – I will back link once I write the article); and
5. Zero interest introductory rates can be used with caution (but please compare the effective after tax hourly rates of the effort).
What are your opinions on credit cards?
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