Do You Really Need a Credit Card?

Today is a guest post from personal finance writer, Alban.  He offers tips on how to use credit cards effectively and helps people to compare the best credit cards online.

Having a credit card is something that many people simply take for granted as a necessity. However, a credit card can in reality cost you more than the convenience could ever be worth when you consider the interest charges, annual fees and transactions costs associated with owning and using a credit card. If you’re still not convinced, consider the benefits and drawbacks of owning a credit card, and consider the alternatives to this most expensive of all ‘must-haves’.

The Good Things

There is little doubt amongst credit card users that their cards are a useful item to keep in their wallets. A credit card can get you out of an expensive dinner or allow you snap up that online bargain. Are you benefiting from using your credit card:

• For an emergency purchase. A credit card can be a lifesaver if you receive an unexpectedly high bill, or your car breaks down and needs expensive repairs. You can even use your credit card in an emergency situation in a restaurant with friends if it comes time to split the bill and you’ve only budgeted for the one glass of wine, not a share of the three bottles for the table.
• Online or over the phone. You can use a credit card to make online purchases in internet auctions, online stores or with businesses which have real life shop fronts but offer discounts for online purchases. Similarly you can use your credit card over the phone if you are having a purchase shipped from out of town. Plus, you can also make phone and internet bill payments which save you time waiting in line at the post office to pay your bill in person – instead you can deal with an automated system over lunch and pay just about any bill with credit.
• For secure purchases and purchase insurance. Many credit card issuers will offer you an extended warranty or purchase insurance if you use your credit card to make the sale. This often allows you to recoup the cost of a purchase if your item is stolen, lost or damaged, and if you are making purchases online or overseas, you can often benefit from purchase insurance if the product is not what you expected or what was promised when it arrives.

The Bad Things

Accruing interest is not the only thing you have to worry about when you use a credit card. A credit card requires constant vigilance whenever you make a purchase to ensure you remain in control of your debt. Disadvantages of having a credit card include:

• High fees and exception fees. Credit cards can charge you an annual fee from as little as $50 a year to as much as $400 a year simply to allow you to have the card as that doesn’t include any usage fees. Exception fees are the ones which you can avoid if you stay within your credit limit and pay your monthly bills on time, but which skyrocket when you are the exception to the credit card rules.
• High interest rates. Most credit cards will offer interest free days and low interest introductory periods, however at the end of a promotional period, and if you don’t pay your balance back to zero you will forfeit those interest free days and all your purchases will be charged interest. As a result you will be paying for the same purchases again and again in interest charges which can be as much as 20% and even higher if you make a cash advance from your credit card.
• You must always remain in control and informed. As soon as your credit card purchases get out of control or you approach your credit limit you are at risk of high fees and high interest. If you have a credit card you continually have to remain aware of your balance and count your purchases to make sure you are not getting into debt you can’t afford.

So, Do You Really Need A Credit Card?

Remembering the drawbacks of using a credit card, do you need to use credit for:

• Emergencies? No. To cover your emergency expenses, a much more financially sound option is to have a dedicated emergency fund. It is easy to start an emergency fund by opening an online savings account and starting an automatic payment from your wages each week. This payment can be as little as $10 a week and this can quickly add up to a healthy emergency fund. Then, if the car breaks down or you get a large power bill after a hot summer you can access your own funds to pay for the emergency, rather than getting into credit card debt, which can create an emergency all of its own.
• Online or phone purchases? No. A debit card looks and acts like a credit card in that you can make purchases online or over the phone by entering your card numbers. However, a debit card access your own funds, from a linked transaction account so rather than accruing a balance which will be charged interest, you are spending your own money and when your account is empty, you have to stop spending.
• Secure purchases and purchase insurance? No. You can get these same benefits from a debit card too as debit cards are issued by both Visa and MasterCard, through your existing financial institution. Therefore, you have the same security features you would with a credit card to protect your card details when buying online or over the phone, plus you also often have purchase protection included as issued by Visa or MasterCard on their regular credit cards.

If you think there are no alternatives to using credit, think again. it is easier than you think to be financially responsible, spend your own money on day to day and emergency purchases, and break free from the hold of credit card debt.