Steve asks: “Is it possible to live without a credit card? What are the benefits and disadvantages of having one? Does it help with your credit rating?”
Question 16 – Can I Live Without A Credit Card? – Shownotes
Today’s question comes from Steve:
Is it possible to live without a credit card? What are the benefits and disadvantages of having one? Does it help with your credit rating?
Part 1 – Can You Live Without A Credit Card?
First part: is it possible to live without it?
Yes, you could do pretty much everything you need to do in life without a credit card. Either pay cash or pay with a debit card. The only instances I can think of where you actually NEED a credit card. Sometimes (but often this is avoided by using a debit card), car hire companies ask for a credit card to put a deposit on, but that is the only example I can think of.
Part 2 – What Are The Advantages and Disadvantages Of Credit Cards?
- 56 days improved cashflow. With £1,000 spent evenly every month over a year, and interest earned on your money in a current account at 5%, your interest as a result of this improved cashflow is £49 per year
- Earn rewards and cashback. Won’t go into too much detail, but on everything you spend, you can earn either cashback or some form of reward points that you can swap in for cash value. My rewards are used for flights to France and work out at about 2.25% cashback on everything I spend.
- Consumer Credit Act (1974) means that anything you buy on a credit card over £100 up to a limit of £30,000 is supported by your credit card provider (and you only have to put some of it on your card).
- Fraud protection
- Improved credit rating – could help when getting a mortgage – we’ll come onto that later to answer the third part of your question.
- 0% balance transfer and 0% money transfer cards incur fees, but could equate to VERY cheap form of short to mid-term borrowing
Examples of all these advantages can be found in our more detailed article: The Right Way To Use Credit Cards.
- If you don’t pay it off on time (on a fixed date every month in full by direct debit) credit cards are an incredibly expensive form of debt – rates tend to be between 18% and 30% per annum.
- Hidden costs – very expensive for transactions abroad and for taking cash out. You may be surprised when transactions can equate to a cash withdrawal.
- Buying liabilities because they are free now! Need a strong mental attitude. They have a much larger downside. Whereas I don’t agree with the “stay away from credit cards whoever you are” argument that Dave Ramsey, America’s leading personal finance guru, drums into his audience, I do appreciate an interesting point he raises: “no one ever got rich through credit card points”. However, by misusing credit cards, you can get into a lot of trouble. Therefore, only use them if you are 100% sure that you’ll never break the golden rule of paying each month, and you can be sure that they don’t change your attitude towards purchases and expenditure.
Part 3 – Do Credit Cards Help Your Credit Score?
Yes, they help your credit score by putting debt on and paying it off at the end of the month. It shows your lender that you can be trusted with debt.
However, there are many other ways to build up a credit score, including mobile phone contracts (although we advise against this – see question 10 on mobile phone contracts vs SIM only) and paying your household bills (council tax, etc) by direct debit.
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