When are credit cards a good idea?
Different finance professionals have different views on credit cards and I think that has to do with their audience. I prefer to give people the information to make their own choices, rather than making a blanket recommendation.
Here is my take on credit cards:
1. Travel Reward Points
If the reason you’re using a credit card is for points, you MUST pay it off before your due date, otherwise the interest you’ll be charged is likely to be more than the points you earned. The sign-on bonuses that are available with many new credit cards can seem very attractive, but the minimum spend requirement often entices people to spend more than normal and end up with a balance they cant afford to repay every month. Personally, my husband and I pay off our credit cards every pay period regardless of due date, and if we should ever overspend, we pull from savings to cover the deficit. This helps us make sure that overspending on credit cards still hurts, because pulling from savings means pulling from goals.
2. Balance Transfer
If you are using a card as a balance transfer, make sure you know how much you have to be able to pay each month to have it paid off before the interest hits. Many cards will give you 12 months at 0% interest, some will do more depending on the market at the time. There’s usually a fee of 3% or so when you do a balance transfer like this, so you’ll need to account for that as well. Shop around, see if you can find cards with longer interest free periods and lower balance transfer percentages. And remember, minimum payments are the devil! Always make sure you are making the most of your money and don’t pay the bank!
3. Financial Crisis
If you’re getting a credit card to cover purchases you can’t afford but have to make, such as car or home repairs that you can’t avoid, you want the lowest interest rate possible. You might be better off with a personal loan from your bank, check with them first as rates and minimum payments will likely be lower. Don’t worry about reward points or sign up bonuses, these are designed to attract people to cards with higher interest rates. It happens to the best of us, and when you are new on your financial jouney you may not have the savings to cover emergencies yet, but that’s the first goal once you are out of debt!
You should NEVER get a credit card to free up space in your budget.
Credit cards can be very dangerous, it only takes a couple of emergencies to ruin your credit and it takes a lot of focus to come back from that, especially when dealing with job loss or other true emergencies. When you have financial stress, your best bet is to build an initial emergency fund of $500-2000 depending on your personal situation, and then attack your credit card debt with everything you have. Here are some Debt Repayment Plans to choose from!
If you need an accountability partner, or you are so overwhelmed that you simply need someone to work with you while you get started on your financial journey, please don’t hesitate to book a free consultation with me. I would love to help!