I had a bit of a shock a couple of days ago.
My girlfriend saw an unopened statement from my credit card when she was having a bit of a de-clutter and just put it on the side for me to see.
Now I paid my credit card off and cut it up in September last year from the proceeds of selling my house in the UK, so it was a surprise to see a statement. Surprise turned to horror when I saw a balance of $21,000 on it!
Now, fortunately, I then noticed the statement date was July last year. I (unsurprisingly) regularly check all my statements online and keep the unopened posted statements for the sake of good order. I quickly hopped online and checked that, yes, my account was dormant.
But it led me to think about credit cards and the credit card culture.
There was a huge furore in the UK in October 2003, when Matt Barrett, the Chief Executive of Britain’s largest credit card provider, Barclaycard, admitted steering clear of credit cards because they were “too expensive” and that he actively “advised his children against using them”.
You see, in principle, credit cards are a useful form of credit. You put small sums of money on them and pay them off in full within a short time period with no charge at all. In reality, people let the small sums build up and what started off as a couple of pizzas and a bottle of wine ends up in the thousands or tens of thousands of dollars.
I’ll use myself as an example. I’ve worked in consumer credit most of my career since 1994 and, well aware of the potential risks of a credit card, steered very clear of them until 1999.
And then I was accosted by a pretty girl in a rest stop, offering the opportunity to sign up for a credit card. I thought I’d chat for a while, flirt a little but ultimately turn round with my usual response – “I’m sorry, I work in credit and I know how expensive these things are!”
However, it was her birthday, I only had to sign up and I could cancel with no hassles, just, it really was her birthday and she could really do with the bonus…
Well, I was 22 and blinded by an attractive lady, so what could I do? Of course, I was going to cancel the minute it came through.
Only I didn’t. The card arrived two days before I went on holiday with my friends to Ayia Napa – a trashy European party venue. Well, I thought, just take it for emergencies.
And I did only use it for emergencies. That essential bottle of expensive champagne (four of them actually) on my birthday; taking a couple of girls out for drinks and paying all night; and eating in the best restaurants in town.
And so, despite knowing better, I was caught in the credit card trap for nearly 10 years and virtually nothing I bought with it was important and it certainly wasn’t cheap.
So, if a qualified financial adviser, the manager of a high street bank, gets knowingly caught in the credit card trap, what hope does anyone else have?
Fortunately, consumer awareness and access to decent advice is far greater now than it was in the late ’90s. We understand our options better, and there are more of them.
But it doesn’t stop that natural behaviour typical of Generations X and Y, the “I-Want-It-NOW” mentality. And credit access, while becoming more difficult in the current economic climate, is still easier than ever before.
Well then, what are the answers?
- Firstly, look at your options, can you save up for this purchase? Do you really need it?
- If you do get a credit card, get one with a low limit and avoid all those kind offers to extend your limit. Save a little towards it each month and pay it off just before the end of its interest free period.
- If you need to make a significant purchase, go for a personal loan. Make sure you budget to pay that as a priority after your rent or mortgage and resist the sales person’s suggestions to borrow a little extra for the holiday you weren’t planning!
- If you need some emergency cash, get a payday loan but make sure you pay it off when it’s due.
You see, like a credit card, a payday loan IS a useful form of credit. It’s there when you have an unexpected budget crisis; it’s there when it’s worth the extra $50 to get your car back on the road today rather than in two weeks; and it is there for that little treat on a special occasion.
But, also like a credit card, it can be very expensive. Borrowing payday loans to pay off other payday loans or regular credit payments; rolling over your balance (just paying the interest and re-borrowing the principal); not meeting payments, accruing late fees and charges; or using it for that additional unnecessary purchase is definitely not the way to go. The biggest ‘no-no’ is using it to meet regular payments that you just can’t afford in your budget anytime. All you’ll do is build up pressure and eventually explode.
So whatever product you use, think about why you’re doing it and how you’re going to pay it off quickly and easily.
If everyone does that credit, and credit cards, can still be a very useful tool.
The information contained in this blog is correct at the date of publication.