Credit cards: You don’t need one

No, in my opinion. I do not believe that anyone needs to use a credit card.

Living in Debt:
Credit cards are debt, they are about spending money you don’t have and future you has to pick up the tab for what today you is spending.

They fool you into thinking you have more money than you do. A $10 000 limit on your credit card is not $10,000 you have, it’s just pre-approved debt.

Once you have wracked up debt on the card you are stuck with it till its paid off. You may end up paying for that impulse purchase multiple times, due to the interest cost.

Limit your opportunities:
Too many times we have had clients not be able to buy a home because of crazy card balances. If its just a high limit you can cut the limit but just having a card is an expense the bank uses to assess your suitability for the mortgage.

If you use a credit card for a purchase, you put yourself at risk of not being able to buy something when you do need it, as the money you should be saving for the goal (house, trip etc), is instead going to the card.

Easy to Overspend:
If you have $100 in your groceries account to buy groceries, then you can spend $100, not $101, but $100.

With a credit card you have to tell yourself to not spend too much, but most people will. There is nothing keeping you to a limit, other than the card limit (and many cards let you go over the limit before the ping you).

This means you are very likely to overspend on groceries, retail spending, eating out etc, as you don’t have a limit at which you have to stop spending.

But what about reward points?
Reward points or Airpoints are the scam that motivate you to keep spending. You don’t really get much (I worked out recently that a $600 flight needed about $60 000 in spending on the card), and you have to spend a lot to get them.

This keeps you in the habit of spending and makes it much more likely that you will buy something you don’t need and justify it because of the points you will get.

If you don’t change you entire spending plan to use the card a lot (which increases the risk of you overspending even more), then it will take a long time to get anything, and you will still be paying card fees along the way.

What about emergencies?
Many people state they need the card for emergencies. But its not emergency money, its emergency debt you have to pay back, and then if you have another emergency, you have to borrow more and so on. And most of the time its not really an emergency, it’s a want and you ran out of money (new shoes or concert tickets are not emergencies.

For an emergency fund, you should save one in cash, its better for you in the long run and makes it easier to focus to what’s truly an emergency. And yes, we wrote an article on this as well.

But I need it?
No you don’t. In NZ you can get a Visa debit card which should work everywhere. I managed to use one in Nepal with no issues.

Buying on the internet is fine with Visa Debit. Its really only hotels that are a bit of a pain, so unless you travel a lot, the visa debit is fine. If you do travel a lot. Get a card with the smallest limit you can, keep it paid off, and only use it for the deposit nonsense, but pay your account from your regular account.

But even then, the Debit card is fine.

But I’m good with my card, I pay it off every month.
Do you really? There are a few people out there so disciplined that they can stick to spending limits and don’t go overboard, and don’t pay interest. But that person is not me and its probably not you.

The credit card companies are patient and know they will get most people eventually, and most people will end up overspending by in observance, which costs them for future savings. Don’t risk it.

Wean yourself off the card
Many people tell me they don’t use their card, but its still in their wallet. Get rid of it and start to live in cash. The DUX budget plan makes no use of credit cards, as you don’t need one.

So what should you do?
1.       Cut the card up (email us a video of you doing it, and the card pieces for our jar of dead credit cards).

2.       Put a block or freeze on the card (see the next page for how to do this with your bank).

3.       Start paying it back faster than required

4.       Consider a balance transfer card to reduce the interest (see our other article on this)

5.       Build an emergency fund to cover any emergencies.

6.       Use a Visa debit card for internet purchases

Credit cards are debt, and they are about spending money you don’t have. A good financial plan for the future does not rely on debt but on cash, so we should all look to wean

Alan Borthwick