Are credit cards too risky? The truth is credit cards can be great savings tools in responsible hands.
Credit cards are a major innovation in modern banking. Nonetheless, some people opt not to apply for them. Due to stories about the “plastic road to bankruptcy”, they mistakenly think owning and using credit cards can be dangerous to the health of their personal finances.
But credit cards can save you thousands of dollars a year. This and the following reasons might change your mind about applying for a credit card:
They provide an almost universal mode of payment
Credit cards are one of the most universally accepted modes of payment. Whether you are buying something on the Apple App Store, or paying for a train ticket in Switzerland, you will most likely be able to use your credit card for the transaction.
You can also get a supplementary card for your spouse or child – they will be able to make purchases without you having to manually pass them cash (just remind them to use it responsibly).
They give you immediate access to more money
A credit card gives you access to money you don’t have. In most cases, your credit card will have a credit ceiling of two to four times your monthly income. So if you earn $3,000 a month, you would have access to $6,000 to $12,000.
However, we recommend that you only borrow an amount that you can pay back in full by the end of the month. This is because the interest incurred on a credit card debt is extremely high.
In a serious pinch however, your credit card provides you with funds even when your bank account is empty. This could be useful if, for example, you go on vacation overseas and run out of cash before the end of the trip.
They offer savings, discounts and rewards when you spend
Banks want you to use your credit cards often. For this reason, they often strike deals with various merchants.
Why? For example, say American Express (Amex) encourages a restaurant to give a free dessert to all their card holders. This would be good for Amex, because they would make more money from transaction fees. But it would also be good for the restaurant, because a considerable number of Amex cardholders will go there. And finally of course, as a cardholder, it’s good for you because you get a freebie.
Credit card companies have become innovative with their rewards. Some examples ones include:
- Cashback offers, in which you get back a small percentage (e.g. 6%) on everything you buy with the card.
- Welcome gifts, such as luggage carriers or movie tickets, just for applying for the card.
- Direct price discounts on movie tickets, dining, drinks amongst other things.
- Frequent flyer miles, in which your expenses contribute to “miles points” that can give you discounts on plane tickets, upgrade you to business class, and other benefits regarding travelling.
They help you build a credit history
If you have a history of using and responsibly repaying credit card bills, banks will know you are less of a credit risk. This can help when you are applying for other loans in future.
Remember that banks do not just look at your earnings, but at your character. They want to know if you are the sort who will fulfil obligations, and your credit card history can be a strong indicator of that. If you have a thin credit file (no record of having taken and reliably repaid loans), you may be seen as being as high a risk as a constant late payer.
They provide a convenient way to track your spending
Your credit card statement can be an excellent tool in tracking your expenses. Most of us do not pay close attention to how much we spend, and where – this is especially true with regard to small expenses, such as at cafes and supermarkets.
By going through your credit card bill, it is easy to spot certain trends (e.g. you always buy more than you intended in supermarkets, or you tend to overspend at the end of the month).
Ready to start getting your first credit card? You can use SingSaver.com.sg’s free comparison tools to compare the best credit cards today.