By LESLEY GREGORY
Hard as it might be for some of us to believe, there are people who’ve never had a credit card. One of them is my adult daughter. Like a growing number of people aged in their 20s, she’s keen to at least delay the day she turns to credit.
Instead, she uses a debit card for most purchases, using her own money. Occasionally she uses a ‘pay later’ service to smooth out a lumpier purchase, knowing she will have to pay it off in a defined period.
A swing away from credit to debit cards has been evident in central bank data for a few years now.
Debit cards come with a credit card’s convenience but not the temptations. My daughter uses her card to shop online and, through the payments app on her phone, to pay for things like lunch. (Cash, what’s that?) She saves for “big” things like a holiday. If she doesn’t have the money, she waits.
For older generations, though, credit cards are our “normal”. And that’s OK if they’re managed well. I bank my pay, meet expenses with my card, then completely clear it when my monthly statement arrives. Every … single … time. That way I collect reward points I put towards flights to visit my mother (though that’s not as easy as it used to be).
Some people argue young people should have a credit card to build up a history of being able to manage debt, to back them up when they go to apply for something like a home loan. Personally, I think the greater risk for young people is that a credit card will be the end of any savings habit and the beginning of debt as their new normal.
It’s a discussion you might want to have with your teenagers, or perhaps with yourself.
If so, here are 5 steps to getting off the credit card habit:
Prepare (or review) your budget – How much is coming in and going out each month? What are your non-negotiable living expenses? Work out how much the “big bills” take up annually, then divide that sum by 12 to come up with a monthly amount to set aside. What’s left over to save?
Set up 3 bank accounts – Set up a debit card-linked transaction account and have your pay banked here. Set up another account for bills that come quarterly or annually, such as utilities. Establish a savings account where you’ll salt away money for things like holidays.
Set up automatic transfers – Each month, transfer out the monthly amount you need to set aside for big bills, and the amount you’re directing to savings or investments. That should leave in the debit card account the amount you need for living expenses. (When a big bill arrives, have it paid out of your bills account or transfer money back into your debit card account to cover.)
Build a buffer – Ideally, also grow a “comfort” balance in the bills account for out-of-the-blue expenses such as an unexpected car repair.
Cut up your card – Test your budget and cash flow for a couple of months, using only your debit card. Once you’ve nailed your cash flow, ring the bank to cancel your credit card and get out the scissors…
One note of warning about debit cards: when choosing a product, check whether it’s possible for you to over-draw your account and what the fee will be if this happens. Similarly, is there a fee for declined transactions when you don’t have enough money in your account? Choose a debit card where you can avoid these fees, or ensure you keep your balance positive (keep an eye on your balance via your banking app).
LESLEY GREGORY is an experienced consumer and personal finance journalist. She regularly writes for TEBI about the side of finance that isn’t directly related to investing. For more personal finance insights, here are a few of her recent articles: