Money Moves: What You Need To Know About Credit Cards
Welcome to Money Moves by The Twenties Club.
The topic of personal finance is, well, personal. Despite the intrinsic role money plays in our lives, we’ve never been very good at talking about it. Personal finance starts to take shape in our twenties; we’re earning a proper salary for the first time and the excitement that it brings, but we’re also navigating the realities of student debt and investment, saving for a first home and – yes, really – thinking about retirement.
In this series we will work together, with the help of some incredible minds from the finance sector, to de-stigmatise these concepts and find a little financial freedom in the process.
We’ve all had those weeks where money is tight and you’re suddenly hit with an unexpected cost. It might be something big like a new tyre for your car, or smaller like a thank-you gift for a colleague who did you favour, but the feeling is the same – managing your income and expenses is a constant dance.
Credit cards get a bad rep sometimes, with most critics focusing on the consequences of poor money management. But in situations like the above, you can start to see the benefits of a credit card, from having access to back-up funds to being able to cover your costs for the month until payday, and even earning rewards each time you spend.
Here’s my chat with Gemma Macaulay, the head of Transaction Banking at ASB, on three key concerns put forward by readers on the topic of credit cards.
“How do I know if I’m the right person to have a credit card? Should I get one or should all twenty-something’s avoid them?”
Put simply, a credit card enables you to make a purchase now and pay for it later. It can also help make your money work harder for you, by using a credit card to make your monthly purchases and paying it off before the end of the month, giving you interest free days and in some cases rewards for your spending.
Look at the different types of credit cards available to help work out what might be right for you. It could be a low interest credit card, which will charge you less interest than other credit cards if you aren’t able to always pay off your purchases each month. If you can pay off your balance each month you might want a credit card that rewards your spending, helping you treat yourself once in a while by giving you something in return for your expenses. You wouldn’t get that if you paid with your Debit card, for example.
You can also consider other options for borrowing which might be suitable like a Personal Loan for a bigger expense with a repayment programme so you pay it back in a timeframe versus a credit card with flexible payments from the minimum repayment amount through to the full balance due.
Everyone is different. What you will be looking for and how you manage your money will differ to others, so you don’t need to rule things out just because you’re a twenty-something. Banks look at each individual’s situation as part of the application process to assess your “credit worthiness” (your ability to manage the money they give you).
“What’s the deal with a credit score and what does this mean if I apply for a credit card or I want to buy a house?”
Firstly, let’s chat credit score. A credit score is just one factor that might influence your ability to borrow money in the future. It looks at how you have previously managed any financial commitments you have made. For example if you bought a car with finance and didn’t pay back the loan this would have a negative impact on your score or on the other hand paying your phone bill on time each month has a positive impact.
But banks look at your whole picture when you apply to borrow money, to understand how you manage your money now and have done so in the past; this is an indicator of how you will manage repaying any money the bank gives you. What’s important is focusing on good financial behaviour. Part of this is how much you spend versus how much you earn to assess if you can manage a credit card or a home loan and if it’s the right thing for you.
“My credit score is terrible from making bad financial decisions when I was younger – where should I start to remedy this?”
If you’ve found yourself in a position where you haven’t paid back money you owed, you should show what steps you’ve have taken to remedy this. Start with paying back the defaults outstanding (including when collection agencies have been trying to recover the amount owing on behalf of the lender) and by keeping your bank accounts in good order moving forward. Showing how you can manage your money goes a long way towards showing the bank you’ll be able to meet future repayments if you are to borrow again.
“Are there any credit card hacks that might come in handy?”
Key tips to keep in mind when you are thinking about a credit card:
- Set aside or ear mark money each month to pay back your purchases on your credit card, rather than having to find money when it’s due.
- Know your budget, how much you have to spend versus how much you earn and how this aligns with any savings targets you might have.
- Understand the number of interest free days you have on your card and also what the interest rate is that you could be charged if you don’t pay the full amount owing each month.
- If you have a rewards credit card, check out the programme and the benefits you can get e.g. that outfit or make up from Smith and Caughey’s.
- Some credit cards come with the added benefit of travel insurance. If you are travelling overseas, think about if you want travel insurance with your credit card and how the annual fee for these cards compares to when you purchase travel insurance for your trip.
- Test the waters and start with a small limit. If you are confident a credit card works for you then you could increase your limit, it’s not like it’s one limit for life.