Ask LH: Why Would I Need A Credit Card?

Dear Lifehacker, I am 18 and don't have a credit card. I have no need for one, although my bank keeps suggesting I use one. Is there really any point with Visa debit cards and PayPal? I am scared of getting a credit card as I am currently not in a bad financial situation and don't want that to change. And why do some people have several credit cards? Cheers, Card Resistor

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Dear CR,

Don't listen to your bank. Ever.

Seriously though, you should never base your credit card decisions on what a financial institution tells you -- their whole business model is based on lending money and charging interest to maximise their own profits. Often, this leads to mounting debts that the customer cannot hope to pay off, resulting in a perpetual cycle of minimum monthly repayments. This isn't just the bank's fault -- personal accountability also plays a part -- but you'd be wise to view "incredible" credit card offers with a huge grain of salt.

With that said, credit cards do have their uses. You'll occasionally run into situations where it pays to own one -- for example, some hotels won't process debit-only cards or require a larger security holding deposit (these also takes longer to be refunded into your savings account). They can also prove handy when travelling abroad; especially if you're relying on foreign ATM machines for cash. You do occasionally find online retailers who don't accept PayPal, although this is becoming increasingly rare.

People carry multiple credit cards for numerous reasons. Historically, some regions had far more of one card type than the other, so having both Visa and Mastercard was useful if you were frequently away on business. Owning more than one card also allows you to use different them for specific purposes, such as online shopping or as a backup for when your primary card is lost or stolen. Of course, there are also plenty of people who apply for lots of credit cards due to poor financial planning; they like having more money at their disposal without fully considering of the consequences.

So do you need one? Basically, if you haven't encountered the need for one, we wouldn't rush into it. Your best bet is probably a sub-$10,000 card with no annual fee that's only kept for emergencies. You can find plenty of advice on the best credit cards via our ratehacker tag.

Cheers Lifehacker

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Comments

    Im 26 and dont have a credit card,
    To be honest i've never needed one so i never got one, simple as that.
    I do have a debit master card which i use for online transactions, but essentially my personal motto is 'If you cant afford it, dont buy it!'

      yep. I'm 30 and I don't have one.

      Have had them in the past but that was before debit mastercards were so common. They are a total waste of time. If you need credit you can probably get a loan at lower interest or buy something with an interest free period. Or, much better yet, just save up.

      as opposed to my motto, if you cant afford it, get a credit card and have it now!

      So never going to buy a house. You know can't afford it don't buy it.

        ever thought im not as poor as you?

          So you got 600,000 in your pocket to drop on a house. Sure Sure.

    Credit Rating...
    If you ever need to borrow money, you'll need one, and being able to show that you can maintain your balance on a credit card is a good way to start... If you're not having trouble keeping out of dept now, there's no reason why you would develop a habit if you're careful... :)

      hmmmm, I found that my bank's response was pretty favorable when I applied for my mortgage and they asked what the limits on my credit cards were and I said I don't have any. Seemed to be a good answer

        Heh... I recall (way back when) being told that my credit rating was poor because I didn't have one... Things seem to have changed, or maybe it was the fact that it was the Commonwealth Bank..? I soon tired of them though... :)

        Last edited 18/07/14 2:34 pm

          I had a similar situation where my constant repayments and low owing balance is what got me my mortgage. Proven history of being able to make payments.

      This is a popular myth. I work in Finance for a big 4 bank. Credit rating system in Australia is not like the US. It is negative only. This means having a CC wont hurt you but it also wont help you. These negative scores are only recorded when you miss a payment or default on something. This system is changing though, however not sure when.

      Additionally you may find your borrowing capability is lessened by the amount you have available on your credit card (not the amount you owe).

      Last edited 18/07/14 2:54 pm

        This is wrong. Australia has moved to a positive reporting environment (as of March this year), so having a credit card and making regular repayments will help improve your credit score. Seeing as you don't know this, I hope I don't bank with you.

        Credit cards can definitely work in your favour if you use them responsibly - that is to say, pay it off on time every month so that you never, ever pay interest. Rewards cards are where you will see the most benefits.

        The basic idea is this: Move every single expense that you pay via other means at the moment onto your rewards card: DO NOT think this means you have free money and massively blow out your budget (alot of people fall into this trap). Then park all of the money that you would have spent in a savings account so that it is earning you interest. At the end of the month, take that money and use it to pay your credit card bill. This means that you basically get free interest during the month on money that would have been out of your account, and rewards points on all of your expenses. It takes a high degree of self control and budgeting to make this work, but the benefits are substantial for those that can manage it.

        The free insurance on card purchases is a nice bonus as well.

      though it can also count as a debt you're already liable for when applying for a loan

      Not really. All I had to do was show my savings balance. I've never had a CC, always used a debit mastercard.

    I have a credit card because it is convenient and saves me money.

    I can pay for stuff anywhere - online, overseas, over the phone etc. PayPass makes paying with a credit card in person so damn easy.

    The credit card gives me some protection over having my money stolen.

    My card gives me points that I can redeem for cash off my grocery shopping. $10 off pretty much every time I shop is nothing to sneeze at. It's the best sort of saving too, since I needed to spend the money on groceries anyway.

    By putting as many of my expenses on my credit card as possible, I maximise how long my money sits in my offset account, saving me interest. It's not a huge amount but it adds up over time.

    After fee's, I save around $1000 a year by using a method of payment that is more convenient than any other I have tried. A pretty good deal IMO. (I use the Coles Credit card for those interested)

    The only reason I can see to not get a credit card is if you have the mentality that it is not really your money and will spend beyond you ability to pay it back. In which case, learn how to budget, then get a credit card to save more money.

      Interesting point of view. It looks like your method involves a fair bit of attention to detail, but those numbers show that it can be worthwhile.

      I'm a bit too absent-minded to handle that, so I just use a debit mastercard. Some of the benefits, but I'm not going to accidentally forget a payment and start racking up fees.

        It sounds complex but it is actually very simple.

        Once a month I get a credit card bill with a due date. I log into my offset account internet banking and set up a payment for the day before. That is all I have to do to manage it and it takes 2 minutes a month.

        When I shop at Coles the operator (or self serve machine) asks if I want to redeem points for $10 off. I say yes. Done.

        It's a dead easy way to save a very significant chunk of money. Plus, a credit card gives me more payment options and better protection of my money.

        The big risk with debit cards is that if your card is compromised and someone makes unauthorised purchases on it, the money has already disappeared from your account. With a credit card, you can dispute the payment and you haven't lost any money waiting for the dispute to be processed.

      Woah, what card gives you so many points it's $10 off each shop and how fast can I sign up for one?

        Its the Coles credit card, which combines with Flybuys points (the flybuys thing is on the card). I have the rewards card which costs $49 a year.

        Places that give flybuys (like coles or coles petrol) gives you 3 points per $1 spent. Other purchases (such as your bills etc) give 2 points per dollar spent.

        You can redeem 2000 points to get $10 off - they ask at the checkout whenever you have enough. We shop about once a week.

        Your mileage will vary depending on how much you spend. My partner and I pay almost everything through the card. We have a few investment properties so all the bills for them go through the card too. It adds up quickly. Keeping the money in our offset account longer also saves us interest.

        If you have few expenses through the card it might not be worth it, so definitely crunch the numbers. There is a card with no fee that gives fewer points per dollar spent.

        Last edited 18/07/14 4:09 pm

      This. I wasn't a credit card user until I had a home loan with a 100% offset account. Being able to maximise the amount of time money was sitting in my offset account through the use of a credit card (paying off in full every month) was a small help. It's not lifechanging amount of interest saved, but a bunch of small non-lifechanging amounts end up making a difference.

    I used to be squarely in the 'credit cards are the worst as they make you spend money you don't have' school of thought, but I've had one for a few years (I bought it after reading on of the monthly ratehacker articles), it gives me free international travel insurance which is fairly comprehensive, as well as no foreign transaction fees.

    Also, paypal gives you rubbish forex rates, so a no fees credit card is also a winner for international transactions (such as amazon, in USD).

    I'd honestly rather not have one. But some automated machines (especially parking ones) won't accept vis debit cards. So living close to the city it's either have one or carry change all the time.

    Almost 40 and never had a credit card. Never had any of the problems mentioned in the post with a Visa Debit Card.

    27 here, never had a credit card, my debit mastercard pretends it's a credit card for every use I've encountered.
    I'd say if you don't need one, don't get one.

    I pay everything I can with my credit card, just to get Qantas FF points. Twice a month I log into the online account and pay the card, so I don't have to pay interest.

    People completely misunderstand credit cards. Ask a Farmer about whether credit is necessary in life and they will wholeheartedly tell you they could not survive without credit.

    So what is credit? It is simply the timing difference between income and expenditure. That's what it SHOULD be treated as. The trade-off for that time gap is generally interest. It's a good deal if you need something.

    But since credit cards come with a 55-day interest free period, they are an EXCELLENT way of tiding you over until you get paid, when that thing you *need* is needed *now* and you haven't been paid yet.

    Also, for anyone with a mortgage, credit cards should be a necessity and absolutely used along with an offset account for the mortgage. Why? Because interest on your home loan is calculated daily, but for 55-days your credit card purchases are *interest free*. See where I'm going with this?

    - Have only three accounts in your life. Offset, mortgage, and credit card.
    - Have ALL Money deposited from any source of income into the offset account
    - Buy EVERYTHING you can on credit (have a credit limit that can cover you for a full 60 days)
    - Pay the *full* amount off your credit card a day or two before it is due

    This way, you are effectively reducing the interest paid on your home loan, because for 55 days that money is offsetting your loan amount and therefore your interest.

    Last edited 18/07/14 4:12 pm

    Credit cards a great if used appropriately. I have a credit card that I use for petrol, groceries, car services etc, and I have a debit card that I use for online purchases.

    I have an Amex account with a major bank that is tied into my offset mortgage.

    As a result, we effectively dont use cash for ANYTHING and pay all of our bills on credit card. This helps us with our offset mortgage and most importantly (for us) is that I have become a points whore.

    For each our last 2 holidays we have got at least $1500 worth of accommodation or car hire purely off points. My wife and I also pay for items for work and have them reimbursed as well were possible to build our points base. Additionally, we also use the credit cards' travel insurance policy AND have extended warranty on purchases we make.

    However... as it has been mentioned before, its only worth it if you pay off the card every month and accrue no interest. If we didnt do that, we would get NO real benefit at all.

    I suppose my answer is: Its worth having a credit card ONLY if you can manage it. If you dont trust yourself, then dont get one.

    Also... I dont know why people dont have debit cards though, its almost mandatory these days and the banks seem to issue them by default.

    Agree with the positives of credit card use. If being 18 get a card with a minimum limit (normally $1000) and keep as an emergency card. If your incomes and expenses allow, investing in a rewards card could be an option to upgrade to. I personally love to travel and assume most people generally travel once a year.
    With this logic credit cards can help accumulate many frequent flyer points which are excellent value for redemption when you consider the $ value of the points. I just got a new AMEX which came with 50000 velocity points and have accumulated 100k worth of points through usual spendings in past 6 months. This could be used for return flights to LA or Europe, when you think what they cost usually the value is great but only if managed smartly and statement balance paid each month.

    I have a credit card and pay it off in full every month. It's a no annual fee card, and paying it off means I pay no interest

    As with anything financial its all about being smart. Not spending $$ you don't have, and paying it off on time (many cards have interest free days). Im 29 and have had countless Credit Cards. Never paid any interest and only paid annual fees when the offer for the card out weighs the cost.
    The main reason I sign up for cards is the Qantas FF points. Just recently there was a CitiBank offer for 80,000 sign on bonus points ($300 annual fee). There is currently an ANZ card offering 50,000 sign up bonus points for no annual fee! Sign up yourself and your partner, bank your 100,000 points and there's one return economy flight from Sydney to LA.
    When the year is up, i'll either cancel the card, or depending on the perks, call the bank and get them to waive the annual fee.
    Some cards also offer insurance policies for goods purchased/extended warranties. Some offer travel insurance and depending on how good that policy is, you may not need to take out separate travel insurance.
    Some have concierge services that can organise all kinds of things. Some offer discounts on goods and services if you book through the credit card.

    There are a host of good reasons to have a credit card, it's all about being smart how you use them. If you're not financially inclined then it's not something I'd recommend as quite obviously you can get yourself into a lot of trouble.

    I'm 12 and what is this?

    Actually, I'm 28 and don't have a card. For online purchases, my Visa Debit card has been always accepted where PayPal isn't. And for my home loan application, I got it right away, as I had a stable job (6 years in the same job), plenty of money in the savings account (saving $200 a week, most weeks) and paid my (non bank) car loan off rather quickly. When they saw that, my loan was approved almost right away.

    Not having a credit card stops me from falling into the "Eh, I'll find the money later" trap and ensuring I keep a close eye on what I have in the bank.

    Things may have changed in the 2 years since we got the home loan, but I've found that I'm doing all right for not having a credit card. Just make sure you have a rainy-day fund just in case.

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