Money Mind-set series – Credit Cards
Money Mind-set is the concept of having the right thoughts about money and setting your mind set accordingly. It’s about focusing to spending only money you have, not racking up debt, and saving as much as you can for your goals. A good money mind-set will help you grow wealth better over the years, and remove all the money stress most people have.
This entry into Money Mind-set is about Credit cards.
One of the things that comes up a lot with the debt repayment strategies I help people with are credit cards that have been racked up quite a bit (overdrafts fit into this category as well, but are less common).
It’s easy to think of credit cards as only an issue for people who are bad with money, but I am going to go one step further state:
NO ONE NEEDS A CREDIT CARD!
Credit cards are only for spending money you don’t have.
That’s pretty definitive right? Now you will have a bunch of questions and I will answer some of the key ones (feel free to email with any additional questions you have).
My reasoning is this; credit cards are debt, they are about spending money you don’t have, and far too easily allow the risk of you overspending. If you don’t have a credit card you cannot overspend, but no matter how good you are financially, a credit card increases the risk of you spending what you don’t have.
Better to get rid of them and not have the risk.
The argument about buying off the internet no longer holds as you can get a Visa Debit card which will do the same job.
So, what’s the solution if you don’t have a credit card?
Save! – have cash for this money, put aside money each pay to cover your expenses, so when an expense comes up you might have used the credit card for in the past, you use this money instead. It’s a much better feeling to pay for something in cash like an emergency payment or trip, than to borrow money for it and then have to pay it back.
So, here are the common questions:
What are the downsides to not having a credit card?
For the most part there are none, though you will have to save some money for actual emergencies as you don’t have debt to fall back on.
So far the only two annoyances I have found (as I don’t have a credit card) are for hotel and rental car bookings. They are a bit more of a pain when you ‘only’ have a visa debit card and they want you to pay a deposit. All that happens is that the hotel so far just takes $100 off you and reimburses it when you check out. A minor annoyance in the grand scheme of things.
When is a good time to have a card?
Never! Well almost never. If you run up expenses for work and there is no work card you can use, it might be ok to use a credit card and reimburse it from work, but really eftpos is fine. You just need to have a bit of a buffer.
If you were travelling overseas to a really odd place, maybe having a credit card loaded up with a bunch of cash might help if you get stuck, but again, having enough for your trip will be fine in most cases.
What about an emergency fund?
A lot of people justify having a card as an emergency fund in case life hits the wall, the car dies etc.
In theory this is okay, if the card sits in a cupboard and has a $0 balance and is only ever used for the 2-3 things that constitute an emergency.
But in reality, most of this can be avoided by saving an emergency fund. Ideally a 2-3 months’ income fund is what we should have, but that’s a longer term goal. What I am referencing is a $1-$2,000 fund (depending on your family size and need) to cover a few emergency expenses out of the ordinary like medical expenses, car repairs, family emergency or giant power bill.
You should really be saving for this. I will briefly allow a card with $1000 limit on it, with a $0 balance, that once you get to $1000 in savings, the card gets cancelled. But this card has to be hidden (or with your mum who has rules about when you are allowed it) and never used unless you hit the parameters as above.
But I am good with money, and I get points/rewards/cashback, what’s wrong with having a card?
It’s a false economy. Are you really that good with money? Do you only spend what you need and never spend a little extra and justify it on the points?
For the most part those points are rubbish and the credit card companies would not give them out if they did not know you would most likely overspend because of them.
If you set a limit on an eftpos card of $250 for a fortnights groceries you can only spend $250. If you have a credit card with $2,000 available there is a very good chance you will end up spending more than this $250 on multiple occasions, because the points have given you permission.
Don’t risk it, dump the card.
How do I transition away from the cards?
The first thing to do is to stop using the card. Cut it up, cancel it if it’s paid off or freeze it if it still owes money, and then just stop. Get a visa debit card for buying online, and make sure you have a robust budget and set aside money each pay for longer term expenses.
Work out a payment plan to pay it off, do a balance transfer for a low rate if you want, but just chip away at it till is gone.
Once the card is paid off, never get a new one, build up cash etc. if you have to have a credit emergency fund to start with, cut the limit down to the fund requirement and then cut the limit as the fund grows.
What do you think about the concept of Money Mind-set? Let me know if there are any other areas you want me to cover and I will add it to the list.