In this article, I impartially discuss the classic piece of plastic we all carry in our pocket, and wonder out loud whether it really is useful for everyone. I’ll discuss the relationship 4 different groups of people have with credit cards are whether their relationship with credit is a match made in heaven, or indeed hell. We look at a wealthy 55 year old, a typically impoverished student, an aspirational young professional and a modern struggling parent. This article is based on journalistic research and should not replace financial advice sought from a qualified financial advisor.
Wealthy 55 Year Old
The Demographic: 55 Year Old professional. Let’s call him Bob. Bob has a small balance, if any, remaining on his mortgage. To be specific, his children have recently graduated from University and a couple are still living at home while job-searching and building roots.
Their Spending Habits: Frequent holidays abroad, Food, Leisure & Executive Cars.
Their Favourite Card: American Express Platinum.
Features: £300 annual fee. Concierge benefits and travel discounts. Must be paid in full every month.
Match Quality: 100%. AMEX platinum cards must be paid off in full at the end of each month, making them ‘spending’ cards rather than borrowing cards. This is ideal for Bob, who has sufficient savings and doesn’t need to borrow. While this means AMEX don’t profit from interest, AMEX enjoys the high transaction fees it charges retailers when Bob splashes out each month, which can be double that charged by VISA and MasterCard.
The Demographic: Lucy is 19 and is 1 year into her studies at a British university. Lucy receives limited financial assistance from both her parents and the state; however her outgoings still exceed her income by £100 per month during term-time.
Their Spending Habits: Lucy sticks to a loose budget, spending very little on clothes and food but still choosing to buy branded cosmetics and spend generously in bars and clubs on nights out.
Their Favourite Card: NatWest Student Credit Card
Features: 18.9% APR, Credit Limit of £500, £250 Cash Advance from worldwide cash machines.
Match Quality: 80%. A relatively tight maximum credit card ensures Lucy can’t destroy her financial future with a ‘designer clothing binge’ as she runs around a designer outlet with card-in-hand. Simply put, this card limits the damage a financially inexperienced student can possibly achieve, and for that reason – this card and similar student credit cards are a good match for the needs of students. Regular student loan receipts ensure that Lucy can pay off the entire balance at the start of each term if she wanted to reign in her personal debt. However if Lucy continues to overspend each term, the amount of student loan left after paying off the previous term’s debt becomes less and less as she progresses through University. Naturally the best route in University is not to take on extra commercial debt at all if possible. Remember that a lot of fun can be had with very little expense if your friends have a similar mindset. When we’re talking about smaller amount of finance, such as Lucy’s scenario, perhaps a loan from the bank of mum and dad is more appropriate.
The Aspirational Young Professional
The Demographic: Samantha is a 26 year old trainee lawyer reaching the end of her training contract to become a practising solicitor.
Their Spending Habits: Influenced by her senior colleagues, Sam’s spending is rather ambitious, justified by her expectations of bringing in a good salary within a few years. Sam therefore isn’t afraid to build up short term debt.
Their Favourite Card: Barclaycard Platinum Simplicity.
Features: Low standard 7.9% APR. Min Salary £20k.
Match Quality: 70%. Foreseeing that she may carry forward significant credit card balances for many months, Sam opted for a credit card with one of the lowest APRs on the market, and thanks to a squeaky clean credit rating built up over the past 5 years, she was approved for the 7.9% rate, which is literally half of what is offered by many other popular providers. However, Sam didn’t realise that other viable options existed for medium term finance beyond the simplicity of plastic. Secured and Non-Secured personal loans (secured on a motor vehicle for instance) as well as authorised overdrafts could be used instead of a credit card and potentially offer a better rate over the medium term.
The Struggling Parent
The Demographic: Dom is a 32 year old account manager and more significantly; a home owning father of four children in primary and secondary education.
Their Spending Habits: Dom sticks to a tight budget in an attempt to keep his head above water. His large mortgage takes a large chunk of his and his partners modest salary each month. Dom doesn’t go on a holiday every year, and often works overtime to free up extra cash to spend on utilities and activities for the kids.
Their Favourite Card: Dom’s credit rating is blemished after a couple of missed bill payments and a CCJ from 4 years ago. As a result, Dom settles for a Capital One Classic Card.
Features: An eye-wateringly high APR of 34.9%, no bonuses.
Match Quality: 20%. So-called ‘credit builder’ cards are sold with the purpose of allowing individuals with poor credit ratings the opportunity to regain some points in the eyes of lenders by paying off their balances consistently. The high APRs therefore, shouldn’t really ever be incurred, as people like Dom should only buy items on these cards that they’re able to clear off at the end of the month. It is a unfortunate fact of life however, that people with poor credit ratings are those who are most likely to use up any available lines of credit, in this case causing a very expensive 34.9% sting.
These cards are designed for people just like Dom, but they’re no more a match than Harrods is a match for shoppers looking for a good deal on their clothing. Without discipline, these cards can cause a lot of damage before their credit limits kick in.