Back in 2019, the stats reported from ME Bank were alarming. Around 40% of Aussies were living pay-check to pay-check. Fast forward one year, and we are living out these statistics. Since COVID-19, more than 2 million Australians could be jobless. This is the highest jobless rate since 1932. For these people, this is a time of uncertainty, strained financial circumstances with many people rethinking how they can be better prepared with their finances.
While we have been raised under the notion that “debt is bad" (and in most financial circumstances, debt is bad), here are three reasons why you should hold onto your credit card.
Since the Royal Commissions, banks have tightened lending of credit cards, personal loans and mortgages; meaning that the credit cards you currently hold may not be approved in today’s lending climate.
Clint Benn from Benn Financial Planning explains, “Your ability to get access to fast credit in case of emergencies is not harder than ever. Simply cancelling your credit card is not the best option for some circumstances."
We’ve all felt the strain on our cashflow recently. While you’re building up your emergency fund, credit cards can act as a temporary emergency fund and provide you with the assurance that you have access to instant cashflow which will help you and your family through difficult times.
Benn has seen this first hand stating, “If managed correctly and with the assistance of a financial planner, using a credit card as a cashflow tool to gain access to fast credit is particularly beneficial for certain circumstances such as transition between jobs, unexpected redundancies and COVID-19 where most Australians are living in a state of limbo. Even if the balance on the credit card is $0, having access to fast credit with a capped spending limit can be useful in dire situations."
Scott Miller from Asendium has experienced first-hand the handiness of using a credit card during transitional periods in his life. Miller explains, “As I transitioned from corporate life to starting my own business, I went from having stability in receiving consistent income to having to generate my own income. I used a credit card with a set limit which I calculated beforehand as the maximum I would need to make the transition between an employed worker to self-employed. If I didn’t have a credit card to provide managed cashflow, I wouldn’t have comfortably made the transition."
For some people, managing cashflow is a tricky business that is more related to their psychological associations with money. For some, just by holding a credit card can provide a sense of security to those who have a fear of “not having enough", especially those who are living pay-check to pay-check.
If you are one of these people, there’s nothing to be ashamed of! Benn explains, “Having been a financial planner for many years, I have encountered numerous people who had the fear of “running out of money". In situations such as this, I recommended my clients hold onto their credit card to break down the psychological barrier so that they can make better decisions and repay their existing debt stress free."
There is a BIG risk to this, and that is – don’t be tempted to use the credit card for everyday purchases! Benn warns, “Credit cards should never be used for everyday purchases. If you ever want to justify whether you need the purchase or not, do this simple calculation to calculate the minimum repayments you will have to make on that purchase:
Balance divided by the number of payments in a year – i.e. $12,000/12 = $1,000/month
Is the purchase really worth it? Be sceptical about using credit cards for “points" as they may be a trap to get you using it more and if you aren’t diligent with your finances or have a financial planner, there is a risk of losing track of your credit card balance and perpetuating your debt cycle."
To be clear, we are not promoting reckless accumulation of debt, however, there are benefits to holding a credit card which can provide you and your family with a temporary cashflow solution. Cashflow is king, and without a credit card, cashflow can be stifled; meaning you are unable to overcome short term issues.
All information in this article is general in nature and does not take into account your financial situation. We recommend seeking guidance and financial strategies from a financial planner before considering executing any financial strategies.