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Credit cards - boon or curse?

Since the huge growth in credit cards in the 1960s they have gone from being a gimmick to an essential part of our financial system; who would dream of leaving home today without one! In the early days however they were something of a nuisance; I well remember the times when we used to stand fuming in a checkout queue whilst a red-faced individual at the front paid by credit card and the poor checkout operator had to make telephone calls in order to authorise it; thankfully efficient point-of-sale technology now means that it is usually faster and far easier to pay by plastic than by cash. And that, for many people, has become a major problem.

We can now get credit cards which boldly carry the names of favourite football teams, charities, political parties. We have cashbacks, reward points, air miles and all sorts of other marketing gimmicks but at the end of the day the banks that issue these cards almost inevitably make a thumping great profit from them, because credit cards are expensive.

For starters, the online merchant, shopkeeper, or restaurant owner who charges a bill to our credit card pays the issuing bank a not insubstantial fee of around 2% .  Many people do not pay off their credit cards in full at the end of the month but pay a percentage of the sum outstanding only, and so pay interest charges, not only on the balance but often on the full amount as it was before the last repayment was made! Interest rates can be quite eye watering; fair enough, it is possible to find 0% introductory offers but these rates can often shoot up to around 15% or 16% within a short period, and there are some cards on the market which are aimed at people with a poorer credit record and they can charge double or even more than that. The banks claim of course that they have to cover themselves against fraud and there is some justification for this; however it is fair to point out that the people who suffer the most from credit card swindles are not the banks but the businesses that accept them, many of which can ill afford to lose money in this way.

Against that of course is the fact that credit cards are just so convenient; they save us from having to carry large quantities of cash around with us and if we lose one it is usually a fairly simple matter to cancel it, whereas if we lost a wad of 20 notes they would be gone for ever! Like every useful tool however they need to be handled carefully and the following guidelines are excellent advice:

One) do not try to use a credit card as an easy source of a personal loan. Fair enough, it can be much easier to get hold of than a loan for many people and there are no redemption charges for paying back the outstanding balance but the interest rate is almost inevitably so high as to be almost punitive. If you need a loan, ask your bank manager and you will probably get one far more cheaply

Two) make sure that you pay off the full balance every month! Bear in mind that if you leave an outstanding balance you will pay interest on it, and the following month you will also be paying interest on interest! This means that the sum you owe can quickly spiral out of control. Many people seek credit fixing companies or resort to bankruptcy if they can't keep up with payments.

Three) marketing people have always known that the possession of a credit card makes people far more likely to spend money that could otherwise have remained un-spent; which is why they accept credit cards, and cheerfully pay the fees that they are charged in the first place. Before you buy something with a card please make sure it is something that you really want to buy, and not something that you buy because you can!

Four) resist the urge to have multiple credit cards; ask yourself why do you need them? If the credit limit on a card is insufficient for your purposes it is likely that the issuing bank will raise it if you ask them to, provided that they are happy that you can afford to carry such an increased limit. If they are not confident that you can handle such a high limit, then they will have good reason to do so.

Five) if you find that your credit card debt is increasing, make a positive commitment to leave it at home when you go shopping, and only use it when you have no option, such as when you wish to buy products over the Internet.

Six) if you cannot afford to pay off the full balance at the end of the month, make sure you pay at the very least the minimum sum. If you fail to pay this your credit rating could be trashed very quickly.

Misused, credit cards can plunge people into debt before they realise what is happening and lead them into disaster. Used wisely, they can be an absolute boon and make life far easier, and more secure.

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