Credit cards give rise to consumer debt, it is necessary to analyze in advance the advantages and disadvantages when you want to use it, according to experts.
Recently, I often receive calls from banks offering credit cards. At first, it bothered me, but listening to them constantly offer many incentives, I found it quite attractive.
A friend of mine also uses 2-3 credit cards, once told that he gets hundreds of thousands of cashback every month, redeems points for gifts, accumulates flight miles… Should I make a credit card for myself? What are the criteria for choosing the right card and what should be noted? In terms of financial situation, I have a salary of around 25 million dong, no debt and have a savings book of 500 million.
Trang (Hanoi)
Several credit cards on the market. Image: Siddhartha
Consultants:
First of all, we need to understand that the nature of a credit card is a convenient financial product that makes consumption more convenient and easier. With a maximum monthly allowance, we do not need to have cash to pay for a certain product or service, or in other words, the card issuer lets us use the money. their interest and waive interest for a certain period of time.
At the end of the term, we must return the amount, or else we will be charged high interest rates, and may also affect our credit rating. The system of credit institutions stores debt repayment history data to evaluate a person's "debt repayment attitude". If you have overdue debts, your credit score will be underestimated, leading to bad consequences such as not being approved for a loan or paying high interest rates when borrowing compared to someone with a good credit score.
In this article, let's analyze the use of credit cards in three aspects: convenience, attractive incentive programs and spending management methods.
Usability
First, with credit cards, we don't have to carry money, change money, keep change and avoid certain hassles. This is something anyone can see.
Second, swiping a card is incredibly easy, but behind the scenes is an interesting behavioral finance theory. Psychological research shows that money is one of the "emotional deathbeds" of people. Along with the feeling of joy when owning a favorite product or service, paying creates a certain "loss" in the brain. Therefore, we often consider and hesitate a lot when paying, especially cash.
However, when cards were born, instead of having to give money to the seller, we simply swiped the card. As a result, the feeling of "loss" is greatly reduced, we shorten our deliberations, and spend our money more freely and generously. Thus, using a credit card can be the cause of spending more, saving less.
In addition, this convenience also has a downside caused by losing the card or losing security information, making it possible for crooks to use the card to spend. Resolving these fraudulent transactions always takes time, and cardholders do not always get their lost funds back.
Special offers
As analyzed above, credit cards have an important function of stimulating consumption. To perform the above function, the consumer first needs to accept the use of the card. Since then, annual free programs and cashback programs are offered to customers to use.
The market recognizes many programs, which, if used properly, will bring direct benefits to cardholders such as cashback when going to supermarkets, paying tuition fees, paying insurance premiums, shopping on commercial exchanges, etc. e-commerce.
Expense management methods
Using a credit card is using a consumer debt. There will be two types of good debt and bad debt, depending on the purpose and method of the user. Deciding whether to use a credit card or not, the basic thing lies not in the convenience or preferential programs for the card, but in the method of spending management.
As soon as the income is received, the first thing to do is to extract the savings, or "pay it for yourself" before spending it, or "pay it to others". This amount is more or less depending on the income level and the number of dependents. Then, the portion for expenditure should be classified into essential expenditure and needs expenditure. Essential expenditures are mandatory items such as school fees for children, groceries, housing, electricity, water, and insurance. Expenses for needs are enjoyment expenses such as eating out, travelling, beauty treatments, and buying other non-essential items.
With essential expenditures, whether spending in cash or by card still does not make us "spent" more. Therefore, you can use a credit card, as long as you remember the payment deadline (the issuing bank will have an email or text message reminding you of this). Not to mention, the card's incentive programs focus a lot on essential expenses such as going to the supermarket, paying school fees, and paying insurance.
However, the easier it is with essential spending, the more careful we must be when using credit cards to pay for enjoyment expenses. Some tips to limit these expenses is to set a maximum budget of no more than 15% of your income, or wait a few more days to be sure about the products and services you choose to buy and use cash instead. Use a card to limit purchases just for convenience.
Thus, if you are a good spending manager, know how to properly allocate a budget for essential and need spending, you can fully take advantage of the advantages brought by credit cards and limit your expenses. disadvantages of using the card.
To form a habit of spending and repaying debt on time, you should start with a card with a limit of 1-2 times your monthly income. Regarding which card to choose, you should see which expenditure accounts for a large proportion of your budget to choose a card with incentives for that field.
Nguyen Thu Giang
Personal Financial Planner
at FIDT . Investment Consulting and Asset Management Company
