By Elizabeth Davies
At the beginning of December it was that time of year again – the time when my partner’s bank sends him a letter of congratulations and an increase in his credit card limit.
This time it was an increase from $14,000 to $17,000.
While I’m sure this sum seems trivial to many, to me it’s still an almost unfathomable amount of money.
As the new year rolled around and I was once again confronted with the inevitability of time moving forward I began to contemplate my own financial life, or more importantly how I’m financially defined on paper.
This year I’ll be turning 25, as of yet I’ve never had a credit card, a personal loan, or used any kind of finance company.
While this is something I remain very proud of it occurred to me that on paper I’m a bit of a financial ghost. A bank looking at my history would have no reason to be impressed by my resisting temptation, in fact they would have reason to question me as in no way, shape or form have I proven my financial credibility to them.
It would seem that reaching the age of 25 it’s time to put myself through my first financial test, expose myself to the temptation of a credit card in order to prove that I can one day be trusted with a home loan.
After all, strength means nothing if it’s never tested, anyone can call themselves a vegetarian but that can only be defined as truth in the moment they have a juicy hamburger in front of them and still choose the tofu.
Your first credit card shouldn’t be about learning through making huge mistakes, spending freely and then desperately panicking about paying it off each month.
In my opinion it’s kind of like a training wheel stage when before now I’ve been too cautious to even straddle the bike.
My plan is to get the lowest credit limit possible – in most cases $500. My bills and essential spending will still come out of my standard account meaning all my essential costs are still covered by money I’ve already earned, money I can 100% rely on and have budgeted for.
The card will only be used for the occasional miscellaneous spend. Let’s say the odd movie or glass of wine with a friend. I like to call these little spends cheap treats, they’re almost always less than $50 and I’d say they happen two or three times a month.
It’s somewhat painful to admit that growing up means doing things you don’t really want to do.
I’d rather avoid credit cards all together. Training wheels or no training wheels I’d still ultimately rather not risk the grazed knees.
However I’m old enough and savvy enough to realise that the bank is going to play a huge part in my life until the day I die, and then some.
It’s time to stop being scared of credit cards and start learning how to make them work for me in a smart, responsible way.
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Elizabeth Davies is a 24 year-old graduate of the Auckland University of Technology post graduate journalism course. She writes a weekly article for interest.co.nz on money matters and financial struggles from a young person's perspective.
9 Comments
As soon as you put debt onto your credit card, shift the same amount of money from your current account into a separate easy-access savings account, then use that to pay off the credit card in full and on time each month. Then you'll earn a bit of interest which you can use to subsidise next month's spending.
Welcome back!
Credit cards: I think that having a credit card history of minor usage will be neither here nor there when it comes to applying for a future bank loan. Wouldn't a bank statement or two be just as good.
I got my first one when I heard that hiring a rental car in the UK was either needing me to produce one or to deposit a huge wad of cash with them as collateral.
The key of course is to find one which doesn't have an annual fee (if possible).
Another thought: What about financial union for you both? ie Get a tack-on credit card? Separate accounts have an air of......... I don't know how to phrase this diplomatically....
two rules:
NEVER put an expense on the card because you can't afford it this month.
because if you can't afford it this month, you _certainly_ won't be able to afford that expense + interest + next.months.emergency, next month....which starts the debt cycle rolling.
Glad you're putting in some thought before getting a credit card. Far more dangerous, in my opinion, is a student loan, that is entered into as if it is the normal thing to do, and without any thought as to possible alternatives or any concept as to the ongoing future burden it might be.
There is only one rule with credit cards, and that is to pay the balance in full, every month. So long as your monthly spending is well within your means, you will be fine.
I also suggest getting a bigger credit limit than $500, say $2000 at least, as I see $500 per month as being too small to be useful. We put all our petrol, groceries, etc., on the credit card and pay the bill at the end of the month. You don't have to use the full limit (we go nowhere near ours). On the other hand, maybe one day you will be faced with a big one-off expense, or perhaps book some travel, and then the higher credit limit could be handy.
Tell your partner to tear up any offers of a higher credit limit. From your description of your lifestyle, that's already high enough and there is no point in having the extra responsibility. Our limit has been $16K for several years now, which is more than enough, and I tear up the offers to raise the limit that arrive frequently in the mail as if they were junk mail.
Good decision to get a credit card. Don't be afraid of it, you'll be fine!
If you have a mortgage, revolving credit, good credit history and can use loyalty schemes effectively you can consistantly make or save about $500pa with credit cards in NZ. Take advantage of balance transfer deals to build up a stack of interest free money to offset your mortgage, don't use that card for purchases. Have another card for day to day purchases that will allow you to have a lower balance on your revolving, pay this card in full. Take advantage of deals that have a low introductory rate for purchases than pay it off in full when the rate ends. Take advantage of reward cards that have the first year free then repeat with a different one. By the way best card on the market currently is Amex platinum edge. Think of all this as getting a bit back from financiers
Same as above plus, credit cards offer a lot of convenience. We put all purchases on the card but pay it off in full every time, no interest ever. Groceries, clothes, hardware, fuel, everything. In short we treat it as cash that we leave in our bank earning or saving interest elsewhwere until the day we settle it up in a lump sum.
They are good as ID and for security deposits, they offer some security buffer on purchases which can be disputed and cancelled if needed, can be used online, for minor offshore payments in other currencies, they keep all your payments on one statement where you can analyze it at a glance.
The can be used to shift all or part of a major cost to next month if you time the cycle right, allowing you to save for the payment and have the item now, but not attract interest. eg: washing machine blows up, go get a new one with what cash you can, put the rest on the card and save to pay it up to 6 weeks later, get your washing done now.....
It is simple maths to avoid spending more than you can pay off by being aware of your monthly income and costs.
Because the statement amount overlaps your next months spending you will need a limit basically double your monthly spend. eg: total monthly outgoings = $2500, you need a $5K limit.
Some have fees or not, rewards or not, include basic travel insurance for flights paid for, some offer insurance on items purchased for a period, the list goes on. Look around and pick the best fit for your type of spending and don't be shy to view it use it as you would cash.
Instead of using a credit card and being charged a surcharge or paying a price that the retailer then pays a fee on just pay cash and ask for a 3% discount. Credit cards are a massive trap - there is currently $6.4 billion (in 2012 it was $5.8 billion) owed by New Zealanders on cards of which 67% is not being reduced and incurring an average interest rate of 17%. Of the rolling 4.3 billion balance banks are earning approx $728m of interest every year. So be very scared of the credit card as the numbers prove the temptation to spend beyond means is too strong!
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