TO ANALYSE: Misuse a credit card and you could end up bankrupt – but using it wisely could mean you’re rewarded.
There are over 100 different types of credit cards, but is it worth having one?
A credit card is a payment card that lets you spend money by borrowing from the card provider.
All cards have a limit on how much you can spend and this limit will depend on your income, credit score and ability to repay it.
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When you spend with a credit card, you will be charged interest. However, if you repay the money before the due date, the interest is zero. Interest rates are generally between 15 and 25% per annum.
More than 2.7 million people have a credit card in New Zealand and spend around $600 million a year on credit card interest payments.
Credit card billings plummeted in February with the spread of Omicron, according to the Reserve Bank. For the month, $3.7 billion was spent on credit cards across the country, down 2.6% from January 2022.
Are credit cards useful?
MoneyHub founder Chris Walsh said credit cards could be useful if the user was good with money and could pay off the balance.
“I’m a big fan of rewards cards because some have wonderful benefits, but they’re not suitable unless you can still pay back everything you’ve spent the next month,” he said.
Reward cards offer an incentive to encourage spending, but they sometimes come with higher annual fees. Rewards vary, ranging from cash back to merchandise, gift cards and travel vouchers.
This means that unless you spend at least $12,000 on your card per year and pay off your card in full at the end of each month, most programs probably aren’t worth it.
“If you’re good with money, can pay back what you spend quickly, and aren’t dragging debt, a rewards credit card is worth considering,” Walsh said.
If you don’t need rewards, you may be able to find a “light” card with a lower interest rate or annual fee.
Is it worth the debt?
Walsh said he receives emails every week from people trapped in credit card debt.
That’s why he continues to say that the best credit card is “no credit card at all” for most people, given the high cost of debt they carry.
“I believe they are often debt traps for those who cannot repay what they have spent the following month,” he said.
“For example, 20% interest per annum is the norm, so if it takes you 12 months to pay off a balance of $5,000, you’ve paid an additional $1,000 to the credit card company or the bank. .”
So how do you avoid the debt trap?
Only get a credit card if you can confidently pay it off: If you can’t afford to pay it off within four weeks, don’t use it, Walsh said.
Do not withdraw cash from the card: you are charged interest from the minute you take it out of the machine.
Making more than the minimum payment: Making the minimum payment will mean that the rest of the balance will be charged with a huge amount of interest, which will only make a small dent in the debt.
Pay on time: If you don’t pay on time, late fees are just the start. Your card will also go to your credit card issuer’s collection department and negatively affect your credit score.
Cancel your credit cards: If you’re already having trouble making repayments, cancel the card immediately to avoid further spending and work to pay off the existing balance.