Why You Shouldn’t Avoid All Credit

Recently, I started watching a repeat of a show originally aired on BBC called Bank of Mum and Dad. Twenty- or thirty-somethings who have racked up thousands of pounds in debt and are travelling down a path to bankruptcy, have their mum and/or dad move in with them for a week to get their personal finances under control. To back up mum and dad is Lawrence – independent financial advisor to calculate the true cost of the debt and share an outlook should said-child continue down this path. It reminded me of a show I used to enjoy watching called Spendaholics where similarly aged people with thousands of pounds in debt work with a money savvy woman called Jay who sets a budget as well as providing techniques for savvier spending and psychologist Ben to get to the root of their spending addiction.

At the start of Bank of Mum and Dad, the parents of debt-ridden individual are interviewed about their own money management skills. Having watched four episodes of the BBC series, a similar pattern emerges. Not one of them agrees with credit. They express clearly that “they would never spend money that they have not earned and have never used a credit card nor taken out a loan”. The only debt that they may or may not have is a mortgage (although this isn’t always apparent). For the sake of the show, it’s helpful that they have this stance on credit as it’s clear that their child needs to understand the consequences of spending money that you don’t have by using credit cards and taking out unnecessary bank loans.

When You Can Justify Using a Credit Card

Using a credit card means just that. I deliberately didn’t write spendingbecause that gives connotations of spending money that is borrowed and demonstrating that you areliving above your means. By emphasising the word ‘using’ I can demonstrate that you can use credit cards to help further your personal finance situation. Credit cards have replaced cash for me which, to many may sound alarming. It hasn’t always been this way. I use credit cards to pay for expenses I used to pay for in cash. The method of payment has been altered but the spending amount has remained the same.

I have three credit cards that are active at the moment. I use them for normal spending instead of cash for the following reasons:

  1. I’m building up my credit history to make it easier to apply for a mortgage
  2. I collect points or airmiles
  3. I receive cashback

Most importantly and it begs repeating: I am not using a credit card to spend more than my normal pay would allow me. My spending patterns haven’t changed as a result but my rewards for spending in this way continue to rack up.

Beware – It’s Not for the Faint of Heart

I’m still relatively new to this whole game of using credit cards. A risk-averse attitude prevented me from taking on any credit until I had graduated with a full-time permanent role and guaranteed salary. If I could go back, I still would not have taken out credit. I was just getting into the idea of investing in stocks and shares through index funds so I had enough on my plate learning about that without complicating things by looking at taking out credit at the same time.

Before you consider using credit cards, you need to answer the following questions about yourself honestly:

  1. Do you know how much you spend each month?
  2. Do you know how much you spent last week, month and year?
  3. Do you find your money disappears into thin air?

If you answered yes to the first two questions and no to the last one, you are managing your personal finances carefully.

Read the small print before you apply for any credit card and if you get rejected read this article. If you’re unsure about how successful you will be in applying for credit then find out more on your credit score.

All information provided at Life-Life Balance is for informational purposes only. MM is not a qualified financial advisor. Before making any decisions on your finances you should seek advice from a qualified advisor.