May 22, 2019 | 06:01 AM

Get Out of Debt

29.08.2018Debate: are credit cards worth the hassle?

Australia has a very high level of personal debt.

Australia has a very high level of personal debt. In recent years, average household debts have been as high as $168,600, and by some metrics, these personal debt levels are some of the highest anywhere in the world. Often, the blame for this problem is laid squarely at the door of companies like credit card firms which allegedly exploit their customers. As a result, it may come as a surprise to many people that credit cards and other forms of debt can actually allow people to profit if they’re used in a certain way. So while paying for something on credit has negative connotations for a lot of people, it’s also something that can pay off if done with self-discipline. With this in mind, here’s a comparison of the arguments for and against credit cards. 

Yes: they can pay dividends if managed well

While it may seem counterintuitive, credit cards can actually pay off. The key is to find a card with a “0% interest” offer. These offers vary between providers and consumers should always check the small print, but typically this means that if the cardholder pays off the balance in full every month, they won’t pay anything extra in fees or interest. In fact, they could even profit through cash back, air miles or other benefits.

Using a credit card can pay off in other ways, too. By allowing consumers to build up their credit ratings, they can ultimately help them get approved for a mortgage or other type of loan. This is useful for those who are new to loans. When someone applies for credit without having taken it out before, they won’t automatically be given a good rating. In fact, they’ll usually be pushed down to a worse one because they haven’t had a chance to prove themselves. By putting a small amount of their spending on a credit card and diligently paying it off, however, they’ll be showing a sense of responsibility and paving the way for future opportunities.

No: they cause debt spirals to occur

What’s important to stress, however, is that only people who are financially responsible should take this route with their credit cards. In other words, credit should never be used to access what some people wrongly consider to be “free cash”. If a person has problems with overspending or regularly finds themselves in debt, it’s important to work on that first before shifting focus towards using credit cards strategically.

There’s a big difference between taking out a credit card to idly spend on it and taking out a credit card in order to maximise personal financial returns. Sadly, though, many people who use credit cards fall into the former camp. In practice, only a small number of people take a strategic approach or use their credit cards to work on their rating. In many cases, credit card users find themselves locked in a cycle whereby the only way out of the initial debt is to acquire more debt.

In fact, one survey found that 55% of Australian households had credit card debt and that it was the most popular debt format in the country.  If most of those households were profiting from their credit card usage, it’s unlikely the providers would continue to exist. Credit cards can be worthwhile for those who are in a position to avoid overspending, but for others, they could spell disaster.

Credit card spending is a hot topic and it’s one that many people have strong feelings about, often based on personal experience. Borrowing money may seem problematic regardless of the circumstances, and in many cases, it does turn out that way. But as this article as shown, when credit cards are effectively managed and paid off in a disciplined way, they can actually end up being handy – and even lucrative.

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