The cost of NOT having a credit card

 

The British love affair with plastic continues. According to The UK Card Asscociation, total spending on plastic (debit & credit cards) in the UK in September 2013 totaled £45.8 billion, up over 11% compared with September 2012.

The value of credit cards essentially comes down to one single issue. Can you meet the monthly payments, in full, every single month?

We are, quite rightly, warned of the dangers of credit card debt, specifically regarding the high interest charges & fees on unpaid balances. However, what we are not warned about is how much NOT having a credit card could be costing us.

 

Cashflow

The first, and probably most obvious, advantage of credit cards is that they improve our cash flow by one month. This may seem trivial but, over a long period of time, this can have a huge impact. Let’s imagine that we spend £1,000 on our credit card each month and we pay this off in full at the end of every month (thereby never incurring any interest or fees).

When we use a credit card for the first time, this means that we keep £1,000 in cash which we would have otherwise spent on our purchases.

Let’s assume we open this credit card when we are 21 years old. We improve our cashflow by £1,000 and we invest this with an annual return of 6%. By the time of retirement, say 65 years old, this one month’s additional cash flow is worth approximately £13,000.

You can use a compound interest calculator to find how much you could save.

 

Cashback and rewards

But, it doesn’t end there. Credit card companies offer great incentives for the consumer to choose their card. This can either be in the form of cashback to your account or “rewards”, including flights, hotels, and all kinds of other goodies.

With just six weeks left until Christmas, new research reveals that UK credit card holders could lose up to £323 million by not using cash back or reward credit cards for their festive spending.

With individual Christmas spend estimated to hit £488 per person, this could earn consumers up to £20.50 in cashback or rewards. In a year, this reward could be as high as £227 per household if all spending is carried out on a cashback credit card. However, 15.7 million people are completely missing out as they are using credit cards that don’t offer these benefits.

Not just for Christmas

Throughout the year consumers spend a total of £501.6 billion on credit, debit and charge cards in the UK. Assuming an average return of 1% across reward and cashback deals (in reality, higher returns are available), this spend alone could earn consumers £5 billion a year. With credit card spending predicted to grow by 1.5% in the next year, this figure is only going to get bigger.

 

What does this mean for me?

Well, the best way to know is to check on a credit card comparison website. For example, I have visited TotallyMoney’s cashback cards section and entered my monthly spend of £1000 and the site highlighted that I could get £493 return over 3 years (or £164 per year) if I was to apply for the American Express Platinum Cashback card. £164 saving every year, invested at 6% over a lifetime, would give me £32,760 by the age of 65.

So not only will it tell you how much you can earn on a variety of cards but you can then check your eligibility without impacting negatively on your credit score.

Together with the improved cashflow position above, we are looking at £45,000 additional wealth at retirement if you use credit cards wisely in your life.

 

Should I get a credit card?

If you are not certain you can pay it off in full each month, then the answer is no.

However, if your financial position is stable, then not having a credit card is costing you much more than you might think.

I personally have a few different cashback and reward credit cards, and I use different cards based on the type of expenditure in order to optimize my cashback and rewards.

One thing you should always do is shop around and base your choice on your personal circumstances and your needs to get the most out of your credit card.