What's the deal with credit cards?

quick-smart

This might seem like an obvious and/or stupid question, but what exactly is the point of credit cards?

I know that technically, it's a loan of money from a financial institution at a cost to the borrower, but as we're all spending so much time trying to get out of debt, under what circumstances is it acceptable to use a credit card? Is it only there to be used if you can pay the balance off in full by the end of the interest free period?

Or is it acceptable to have some level of debt providing you have the finances to pay it off within a reasonable amount of time, i.e. you need a new washing machine, funds are a little streched, you have about half the cash you need so you put it on the credit card, pay half off this month and half off next month?

Is it ever ok to just use it to fill a gap, say at Christmas?

Or, should we just not deal with any kind of unsecured debt, and instead just save for 'a rainy day' so those emergencies are already covered?

Sorry, it's a bit long, just a question that's been bugging me!

Shaz

lisyloo

Ideally you shouldn't spend what you don't have.
So this means saving up for things.

Everyone knows the date for Xmas, so why not save a little in a savings account each month, rather than get into debt?
The problem with using credit is that it's expensive - some credit cards are 30% per year. So you end up spending your money on interest rather than paying your debt. This can be a vicious circle which is extreme cases ends in bankruptcy.

However there are some good featuers of credit cards.
One of the main ones is consumer protection.
If you buy something over £100 and the company goes bust then you are protected. Rcently lots of airlines have gone bust and companies like Farepak so it's clearly much better to be protected.
Some cards offer extended warranties, free insurance and cashback.
But the clever people do NOT let these things tempt them into debt.
They simply keep their money in a savings acount earning interest for an extra month and pay them off interest free.
So don't get sucked in.

nomoneytoday

quick-smart wrote: »

Is it ever ok to just use it to fill a gap, say at Christmas?

What gap..? There are 364 days before christmas to plan for it.

Hestia

I completely agree with nomoneytoday - Christmas and Birthdays happen on the same date each year and shouldn't "catch people by surprise"!!

The only reason I have one (credit card) is to provide a modicum of protection when buying bigger purchases, and for shopping online - but I always pay it off in full and never even get close to the credit limit. Apart from this and the mortgage "I don't do debt" and never buy what I can't afford... but then again, my name's not Joe Bloggs...

lisyloo

There are 364 days before christmas to plan for it.

I actually find it good to buy presents (for birthdays and Xmas) whilst on holiday.
You can get some unusual gifts and there are usually some "local" products you can buy for exmaple I bought some coffee beans from Hawaii and some "Hawaiian Slipper" pendants (like flip flops) and of course a few ghastly Hawaiin shirts !!

It's both pleasurable to do shopping as an activity and helps to spread the cost as well as finding unique gifts that you would not find elsewhere in the world.

Obviously you can't buy perishable goods and you need to leave a bit of room in your suitcase, but that's no problem - my tip would be to take some things you can throw away e.g. I'm taking a pair of shoes that are a bit worse for wear on my next holiday and I'll just chuck em whilst I'm there.

CLAPTON

other good features of CC:-

- sometimes its very difficult to hire a car or even book some hotels without a CC even if you are prepared to pay in advance

- and if you like to keep your current a/c balance low (i.e. put any spare cash in an online saver) then a CC allows you to pay for unexpected spending without being concerned about going overdrawn on your current a/c.

but of course always pay in full each month

latecomer

For years my other half and me have spent everything on our joint credit card and then paid it off at the end of the month. We used it as a method of splitting up joint costs as they are all itemised in one bill. Also it allows you to keep your money until the end of the month and gain a little extra interest.

As others have said its also good for buying expensive items online as you get additional protection.

And if you can get a cashback card you can earn a small percentage of what you spend (which you were going to do anyway).

Golden rule for us is to pay full balance each and every month. If you cant afford something then I'd save until you can. And only then put it on your credit card

JimmyTheWig

quick-smart wrote: »

This might seem like an obvious and/or stupid question, but what exactly is the point of credit cards?

For the credit card companies the point is that they make lots of money because lots of people don't pay their balances in full and get charged heavy interest.

as we're all spending so much time trying to get out of debt, under what circumstances is it acceptable to use a credit card? Is it only there to be used if you can pay the balance off in full by the end of the interest free period?

Or is it acceptable to have some level of debt providing you have the finances to pay it off within a reasonable amount of time, i.e. you need a new washing machine, funds are a little streched, you have about half the cash you need so you put it on the credit card, pay half off this month and half off next month?

Is it ever ok to just use it to fill a gap, say at Christmas?

Or, should we just not deal with any kind of unsecured debt, and instead just save for 'a rainy day' so those emergencies are already covered?

I presume that you are talking "acceptable" in a MoneySaving way.

Yes, the ideal is to never spend what you don't have. The best way (from a pure MoneySaving POV) is to get a cashback credit card and pay the balance off in full every month (by direct debit, preferably).

(The other MoneySaving thing you can do with them is stoozing.)

The best thing is to save throughout the year for Christmas, birthdays, holidays, etc. It is best to have an emergency fund in savings to pay for a new washing machine, etc, when absolutely necessary.
But sometimes these things can catch us out.

What if the car, the washing machine and the boiler all break down in the same month? Maybe your emergency fund can't cover that?
What if you've miscalculated Christmas spending and after buying presents for two of your children you have no money left in the fund for the third?

My point is that there will always be the possibility of needing to borrow money. The shorter the time that you can borrow this money for the cheaper it will be for you.
So if you can pay for this washing machine over two or three months then this is going to be cheaper that getting a personal loan to buy it.

Debt isn't bad. Only bad debt is bad.
Borrowing money to pay for a washing machine that you know you can afford to pay back isn't too much of a problem. And if borrowing on a credit card is the cheapest way to do this (it might be or might not be depending on circumstances) then this is thr right thing to do.

lisyloo

What if the car, the washing machine and the boiler all break down in the same month? Maybe your emergency fund can't cover that?

That's a seriously small emergency fund then.
It should be enough to last you between jobs.
If you have unemployment insurance there will still be a period when they don't pay out.
I appreciate that someimes a few things go wrong at once, but it really should be enough to cope with that.
Also your cash ISA savings can double up as emergency funds.
I have ISAs that I don't intend to withdraw from but in a real emergency I could.

What if you've miscalculated Christmas spending and after buying presents for two of your children you have no money left in the fund for the third?

You should really have some savings.
Living "hand to mouth" each month and sailing close to the wind is no way to live.
You need to put money by for all these things.
If you've mis-calculated Xmas then raid your "household maintenance" or "holiday fund".
You shouldn't need the ALL at once.

My point is that there will always be the possibility of needing to borrow money.

I disagee.
You should plan in advance.
If something unexpected does go wtong the worst case should be raiding one of your other fund.
e.g. lets suppose you have notional "pots" for household maintenance, health (optical, dental), holidays, transport and presents.
Lets suppose you overspend on Xmas, the worse case if that you "raid" one of the other pots temporarily.
This way you would need more than FIVE things to go wrong in the same month to be in trouble.
If that happens then you shoudl raid your SAVINGS.
It's all about LIVING WITHIN YOUR MEANS.
If you are really sailing close to the wind each month then you probably aren't doing that.

The shorter the time that you can borrow this money for the cheaper it will be for you.
So if you can pay for this washing machine over two or three months then this is going to be cheaper that getting a personal loan to buy it.

Not necessarily.
It also depends on the rates (although I understand what you are saying).

Borrowing money to pay for a washing machine that you know you can afford to pay back isn't too much of a problem.

Saving up when you KNOW your washing machine won't last forever is a muhc better idea.
How do you KNOW you can pay it back.
How do you know you won't drop dead tomorrow, get sick, have an accident or get made redundant etc.
Generally it's better to save up front rather than buy things you can't afford.
Sometimes things can be unexpected but we all KNOW that Xmas is 25th December, we all know when our car service is due and that appliances will not last forever, so these things should not be unexpected.

And if borrowing on a credit card is the cheapest way to do this (it might be or might not be depending on circumstances) then this is thr right thing to do.

No.
Saving and living within your means in the right thing to do.
No-one should be relying on debt over and above having a mortgage (and possibly a car loan although I've still saved up for this before buying).

edindie

Although I think we’ve gone a little off topic here, and I agree with your point in general Lisyloo (that planning is often useful…) I think there is still room for use of credit cards in day to day life.

For example, I would prefer to buy something on my credit card this month, knowing I can pay it off before I get charged anything, if it meant that I can max out my regular saver again.

Glitzkiss

hi Lisyloo

Whilst I agree with you about having a decent emergency fund and not living hand to mouth you have missed one scenario and that is for those just starting out and in the process of building up their emergency funds.

Now obviously relying on credit is not ideal but an interest-free on purchases CC can be an emergency solution as long as you are willing to do the hard work to make sure it is paid off before the 0% deal runs out.

I have to admit I like the 0% deals but I only use them when I have the money already in the bank and only on things I need. The advantage is I get to keep my hard-saved cash in a high-interest account making me money for longer.