A lot of personal finance bloggers, particularly those pursuing financial independence, are strongly against credit cards or having any form of debt at all. While there are good arguments for this, personally I don’t think it’s quite as simple as that. The question of should you get a credit card is personal but this post will give you the pros and cons to help make your decision.
There are a lot of benefits to credit and having a credit card as long as you use it wisely, which I will outline in this post, along with the potential drawbacks.
Credit has been part of society for centuries. While this alone doesn’t make it a good thing, it does demonstrate that it has been a key component in financial markets and a lot of supply chains – and governments – would collapse without it.
It even gets a mention in Lin Manuel Miranda’s hit musical Hamilton: “He doesn’t get enough credit for all the credit he gave us,” sings President Madison in the finale Who Lives, Who Dies, Who Tells Your Story, which surely makes it worth considering!
In this post I will explain the basics of credit cards, where to get one and the things you should look to avoid.
It’s important to note that this does not constitute personal advice and if you’re not sure whether an investment or savings account is right for you please seek professional financial advice.
The basics of credit cards
In simple terms, a credit card allows you to borrow money against a line of credit, known as the card’s credit limit. You use the card to make basic transactions, which are reflected on your bill. The bank then pays the merchant, and later you pay the bank your bill.
When it comes to getting a credit card or any form of credit, the provider will perform a credit check on you. Everyone has a credit score, which effectively determines how likely you are to pay back what you borrow. Ideally, you want to keep this number as high as possible.
However, if you never make use of any credit, the bank will find it hard to establish whether or not you will be able to pay back a loan. While this won’t be a problem most of the time, it could make it harder for you to get a mortgage or any other loan you may require in the future.
If you want to build up your credit score safely, buying a small amount on a credit card each month and paying it off in full can really help.
Of course, all of these benefits can also be negatives. If you take on more credit than you can afford and start missing payments then your credit score will fall. Rather than helping you get a mortgage or another kind of loan in the future, this will make it much harder. You could even struggle to get a new mobile phone contract.
Where to get one (if you want one)
It seems you can get a credit card from pretty much anywhere now. But just because you can doesn’t mean you necessarily should.
I got my first credit card from the bank I used for my current account. I was only 21 when I got my first card and knew very little about all the options available. So, I decided to sit down in the bank with an adviser to decide on the best option for me. You don’t have to do this, but I would recommend taking advantage of this free service.
You’ve probably been offered a store credit card before when you’ve been paying for a purchase. These usually come with a store discount or similar exclusive offer. These incentives may be very tempting, but you must read the small print before you sign up for something you may later regret. Many come with high interest rates and penalties that could end up costing you a lot of money.
If you’re not sure a traditional credit card is for you there are other options. One popular alternative is PayPal Credit, it is flexible and the debt is cleared once you’ve paid it off. However, much like a credit card, this is still only a good idea if you have the funds to pay for the purchase.
Alternatively, some people chose to solely use a debit card. This offers a lot of the same consumer protection as a credit card but will not allow you to spend money you don’t have, unless you have a pre-agreed overdraft.
There are also other kinds of loans available. Mortgages are a common example – you’re hardly going to buy a house on a credit card. But there are also other financing options available for all kinds of purchases, including sofas, electronics and cars. Of course, like all forms of credit, you should make sure you will be able to pay the full amount before you take on the financial commitment.
What to avoid when getting a credit card
As a general rule, you should always avoid spending more than you can pay in a month. Credit limits are often higher than your monthly salary, but this does not mean you have to or should spend more than you earn.
If you do need to make a large purchase, come up with a payment plan in advance so you know how long it will take you to pay it off. Once you have a plan, make sure you stick to it to avoid incurring unexpected interest fees.
Most importantly, you must never miss the minimum monthly payment. If you do, your credit score will go down. This could make it harder for you to get a mortgage or even get a mobile phone contract in the future. You will also have to pay interest on the money owed, increasing your payments significantly.
I felt this needed its own section as it has the potential to be incredibly dangerous. While it is not the only service of its kind, it is currently the most prominent.
I’ve seen a lot of influencers promoting Klarna to their, predominantly young and impressionable, followers. This is often added to a post encouraging them to buy from a fast fashion outlet, which they know their followers will want to buy.
Klarna is marketed as a safe option – ‘buy now, pay after pay day’ seems like a great idea to many people, especially those living paycheque to paycheque. Since lockdown began, 23 percent of 18-24-year-olds have turned to buy now, pay later services.
They claim the service won’t affect your credit score, but there are plenty of accounts of people saying their credit score has fallen after using Klarna.
If you read the terms and conditions carefully there are serious consequences to missing a payment or not having enough funds in your account. They even threaten to send in debt collectors and make you liable for the costs this incurs.
Instead of encouraging young people to spend money they don’t have, wouldn’t it be great if we taught them more about personal finance and encouraged them to save more, just like A Dime Saved does in this post.
So, should you get a credit card?
Like all financial decisions, credit is a personal choice and you should always do what is right for you. However, I hope this post helps you consider the different options and raises some points to consider when making your decision.
If you found this post interesting, please like it and share across social media or send it to your friends. I’d also love to hear your thoughts and experiences. What do you think about credit cards and Klarna?