You probably use one every day, but have you ever really stopped to think about how credit cards really work?
Have you ever thought about why banks put certain rules and regulations on loans, and not on credit cards?
Once you do, you might start thinking some of the rules around credit cards don’t necessarily make a whole lot of sense.
If you take out a personal loan, the bank or lender you choose will need to go through a painstaking process to make sure you’re using that money for the right purpose. Whether you’re using it to buy a car, or a trip overseas, you’ll need to fill out pages and pages of questions to ensure that you’re not wasting a cent on something the bank doesn’t want you to spend money on.
But with credit cards? You’re given absolute free reign. Want to blow your money on something that’s going to lose its value tomorrow? No problem. Want to take out a cash advance and blow it all on the races?
Go nuts. Isn’t that a little strange?
Here’s something else that’s strange – because of the way credit cards are often used, we can easily end up paying far more for a credit card than we would ever for a loan, even if we’re using the exact same amount, for the same purpose.
According to ASIC, the average credit card debt in Australia is about $4,200, with the nation collectively owing more than $40 billion on cards. But according to a Finder survey from 2014, the average minimum repayment is only at 2.33%. That means it can take years for people to pay off a credit card. Mozo research has found similar timelines.
You don’t need to be a financial analyst to see why this is. Once you have a credit card, it’s easy to spend money on purchases that add up over time. You just keep taking out your plastic and paying for whatever you need. This is why credit card providers constantly promote 0% interest periods – you just end up hopping from one credit card to the next.
Of course, there’s nothing wrong with being able to pay for things easily. And there are plenty of people who use credit cards to their advantage: over 60% of people never actually pay any interest. Credit card providers make their money on the minority who do.
But because using plastic is so tempting (and convenient), it’s easy to lose track of purchases over time: anniversaries, Christmas presents, holidays – they all add up.
There’s a better way forward. Think about your upcoming expenses – Christmas, maybe a holiday in the New Year. If you’re going to use some sort of finance to fund that particular expense, why not use a personal loan?
You might think that seems odd. But actually, it makes a lot of sense. If you need money for a particular point in time, you’re going to be better off in the long run if you take those funds and use them for a specific purpose. That way, there’s no way to be tempted to use the money for something else. Once the loan is paid off, it’s gone – forever. No lingering debt.
Loans are for a fixed term, so you always know you have to pay it off by a certain date. It’s easier to factor that in to your budget and not get caught up in the credit card cycle.
We’ve trained ourselves to think of credit cards as the only way to pay for big expenses, even though loans are just as accessible – and they take less time to pay off. And with the rise of online platforms, accessing funds by applying for personal loans online really isn’t any harder than applying for a credit card online.
The next time you’re planning a big purchase, don’t just reach for the plastic automatically – consider whether a loan will better suit your circumstances. You’ll be glad you did.
*This article is not intended to provide any particular advice on credit card and/or credit card companies. It’s the view of The Head of Marketing of a Fintech company*