With credit card use plunging, do you even need a credit card anymore?
- When you do need a credit card
- When you don’t need a credit card
- Pros and cons of credit cards
- Common credit card myths
In case you missed it, buy now, pay later platforms (BNPL) have been soaring in popularity over the last few years and they’re set to grow even further, potentially doubling their market share by 2023. For those of you playing along at home, around two million Australians (one in 10) currently use BNPL platforms. By 2023, over four million Aussies (one in five) are expected to be using them. Afterpay’s research suggests Millennials are turning away from credit cards, whereas Gen Z isn’t even signing up (94% of Afterpay Gen Z customers link their account to a debit card).
The reason? Interest.
“I personally don’t like the idea of getting a credit card but I do like to use Afterpay because there is no interest,” said 22-year-old Will in Afterpay’s research report. The same report also suggested that watching their parents suffer through the GFC has made Gen Z wary of credit cards and unlikely to use credit-orientated products. Meanwhile, credit card use has plunged during the COVID-19 pandemic, particularly among Millennials, while many others have been busy wiping off their credit card debt during lockdown.
So with all the payment systems around today and younger generations less inclined to use credit cards, is there an argument for using credit cards anymore?
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When you do need a credit card
Like it or not, credit cards do have their uses. You’ll occasionally run into situations where you actually do need a credit card - for example, some car rental companies and hotels don’t accept debit cards when taking your booking. That’s because if any unexpected costs arise (like damage to the rental car) the company knows they can just use the funds from your credit card, whereas your debit card may not have enough money on it to cover the costs.
However, this is becoming less common and many hotels and car rental firms in Australia (and some countries overseas) now accept debit cards, including Avis, Europcar and Hertz. Just keep in mind that you may be required to part with a larger sum of money as the bond, and it could be weeks before you get this money back.
While we advocate that saving for a holiday is usually better, using a credit card to pre-book your flights and accommodation could score you a cheaper deal. Plus, if you use a travel rewards card or a card with a frequent flyer rewards program you can literally be rewarded for spending money on your holiday. Some cards also offer complimentary travel insurance when you pre-book your flights and accommodation with a credit card, so that’s something to think about.
With all that said, Managing Editor of travel rewards website Point Hacks Daniel Scibberas said there’s no real reason people actually need a credit card.
“If you don’t have a credit card, you can still get by with using cash or debit cards,” he told Savings.com.au.
However, there could still be an argument for credit cards now that more businesses are pushing for cashless transactions thanks to COVID-19.
“I suspect that in the near future, there will be businesses that will only accept card transactions, increasing the need for a credit card, especially if your bank does not provide debit Visa or Mastercard,” he said.
When you don’t need a credit card
One of the worst reasons to take out a credit card is because you want one just for the sake of having a credit card. Taking out debt of any kind when you don’t really need to is never advisable, particularly if you’re paying 20% interest on it.
You also don’t need a credit card to travel overseas. For more info on this, read: Using a debit card or a money card instead of a credit card while overseas.
You certainly don’t need a credit card to shop online in 2020 when we have options like PayPal, the many BNPL platforms, and your trusty old debit card. Speaking of which, if you’re an impulse shopper you should avoid credit cards too because you’ll quickly find yourself drowning in debt if you’re already irresponsible with money.
Mr Scibberas said those who have difficulty paying their monthly balance off in full should really reconsider their need for a credit card.
“Interest on a card is charged when you pay off only a portion of your monthly balance, and if you fail to pay the minimum monthly amount, a further fee is charged on top of that,” he said.
“This could lead many into a debt spiral that is hard to get out of and you are far better off looking to get a debit Visa or Mastercard where you can make a transaction from those merchants that only accept Visa or Mastercard as a payment method instead.”
CEO of Financial Counselling Australia, Fiona Guthrie says people need to think more about the consequences of credit cards.
“Financial counsellors won’t tell someone that they should or should not get a credit card. It’s more about encouraging people to think about whether they can afford to have one,” Ms Guthrie told Savings.com.au.
“People often make lots of small purchases thinking they’re harmless but they quickly add up to a lot of debt.
“While credit cards are very convenient, it’s easy to get into debt by using them when you can’t actually afford to. Many people have more than one credit card and it’s hard to keep track of how much you owe on each.”
Ms Guthrie says the majority of people who call the National Debt Helpline are in credit card debt.
“At least once per week, someone will ring who has over $100K in debt,” she said.
Pros and cons of credit cards
If you’re disciplined and can control your impulses, credit cards can be very useful and offer many benefits that debit cards don’t.
But if you don’t understand how credit cards work, they can quickly land you in a world of pain.
Rewards programs may not be worth it for everyone
Credit card fraud is rife
You’ll be paying high interest rates if you fail to pay off the card on time
They’re generally safer than cash
When applying for a home loan, your credit card limit may be treated as an existing debt, even if you have no debt outstanding on the card
They’re often optimised for travel
There’s a wide variety of credit cards to choose from
So many fees! There are often annual fees, missed payment fees, fees if you go over your credit limit, balance transfer fees, overseas transaction fees, and rewards program fees.
They’re convenient if you need money in an emergency (of course, an emergency fund is even better)
They can damage your credit file if you use them irresponsibly (though this one is technically more user error than a fault of the card itself)
We’ve written more about the advantages and disadvantages of credit cards here.
Common credit card myths
Myth #1: Credit cards should always be avoided
Mr Scibberas said the most common myth is that credit cards will always come at a cost and should be avoided.
“While it is true that some people do not manage their finances well, if you fall into this category, then you should reconsider your need to have a credit card,” he said.
“This is because if you don’t pay your monthly credit balance off in full, you will incur interest charges and can land yourself in a debt spiral that you can’t get out of and far outweigh any reward benefits that you may get from your card.”
Myth #2: You need a credit card to build up your credit history
Contrary to popular belief, you don’t actually need a credit card to build up your credit history. There are other ways to build up your credit history without taking out a credit card, such as paying your bills and rent on time.
Myth #3: You only need to pay off the minimum balance each month
This is a perfect example of just because you can do something, it doesn’t mean you should. While you technically can get away with only paying off the minimum balance every month, doing so will come at a significant cost.
Source: ASIC MoneySmart
If you only pay off the minimum balance every month, you will end up paying more interest and it will take you longer to pay off your credit card debt. That’s because interest keeps accruing on the amount you owe, and because credit card interest is so high, it means you’ll be in the red for a long time.
What about Pay As You Go credit card?
In Australia, pay as you go credit cards are referred to as prepaid credit cards. While they’re called a ‘credit card’, prepaid credit cards don’t actually offer a line of credit and you can’t borrow any money. Instead, prepaid credit cards work very similarly to a debit card, except they’re not linked to a bank account.
You can load up your prepaid credit card with money from your bank account and are only able to spend the money that’s on the card. This can make them a good alternative for people who don’t want to get into credit card debt or who want to manage their spending, though you could argue that you may as well just use a debit card.
Pros of prepaid credit cards:
Prepaid credit cards can be safer than carrying cash because they’re usually PIN protected and because they’re not linked to your bank account, thieves can only spend the amount that you’ve put on the card
Prepaid credit cards don’t charge any interest
Some prepaid credit cards can give you access to multiple currencies
Some can give you rewards points
Prepaid credit cards can be a good budgeting tool for those who don’t want to rack up debt with a credit card
Cons of prepaid credit cards:
Some prepaid credit cards charge an establishment fee, currency conversion fees, declined transaction fees, closure fees, and even a reload fee if you want to top up the card
Some prepaid credit cards have a maximum amount of money you can carry on the card at once, which could impact the way you want to use the card if the limit is too low
What to know about credit cards before getting one
Before taking out a credit card, you should do your research on everyday finance websites like Savings.com.au. It’s really important to be financially literate about credit cards before taking one out as they can lead to massive amounts of debt when used incorrectly due to their very high interest rates.
While there’s technically no limit has to how many credit cards you should have, too many credit card applications will harm your credit score.
A really common mistake people make with credit cards is only making the minimum repayments every month. By doing so, interest continues accruing on the remaining amount you owe and before you know it, your debt has spiralled out of control. This is why it’s extremely important to make the full repayment every time you get your credit card bill.
Another common mistake is being late on repayments. Not only will you be charged a late fee and a penalty interest rate, it could also significantly damage your credit score.
Can I have a credit card and not use it?
If you have a credit card and don’t use it, your account will just tick along with zero balance. You won’t be charged any interest, provided the credit card is paid off of course.
Savings.com.au’s two cents
The bottom line is that while you don’t need a credit card, they can be a useful tool as long as they’re managed correctly.
If you’re extremely disciplined with money and pay your balance off in full every month to avoid paying double-digit interest, credit cards can offer lots of benefits and rewards. Credit cards can also get you out of sticky situations where you don’t have enough money to cover you (such as an unexpected medical bill). Ideally though, this is where an emergency fund would come in.
However, if you know you’re not very good with money and have trouble controlling your impulses to spend, credit cards should really be avoided. Similarly, if you don’t really understand how credit cards work and only want to take one out for the sake of having one/your bank says you should take out a credit card, then it would be wise to avoid credit cards.
Ultimately, whatever your reasons are for taking out a credit card, you should make sure you do your research and consider if it’s the smartest thing for you.
Article first published July 15, 2020. Updated December 1, 2020.