Three things to consider before getting a credit card

Credit cards create consumer debt, so it is necessary to analyze the pros and cons before using them, according to experts.

Recently, I often receive calls from banks inviting me to apply for a credit card. At first, I felt annoyed, but after hearing them continuously offer many incentives, I found it quite attractive.

A friend of mine also uses 2-3 credit cards, and once said that he gets hundreds of thousands of cashback every month, accumulates points to redeem gifts, accumulates air miles... Should I get a credit card for myself? What are the criteria for choosing a suitable card and what should I pay attention to? Regarding my financial situation, I have a salary of around 25 million VND, no debt and have a savings account of 500 million VND.

Page (Hanoi)

Some credit cards on the market. Photo: Tat Dat — Some credit cards on the market. Photo: *Tat Dat*

Consultant:

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 limit provided monthly, we do not necessarily need to have cash to be able to pay for a product or service, or in other words, the card issuer lets us use their money and waives interest for a certain period of time.

When the deadline comes, we must repay the money, otherwise we will be charged high interest rates, and our credit rating may also be affected. Credit institutions' systems store debt repayment history data to evaluate a person's "debt repayment attitude". If you have overdue debts, your credit score will be rated low, leading to negative consequences such as not being approved for a loan or having to pay high interest rates when borrowing compared to people with good credit scores.

In this article, let's analyze the use of credit cards in three aspects: convenience, attractive incentive programs and spending management methods.

Convenience

First, with a credit card, we don't have to carry money, exchange money, keep small change and avoid certain inconveniences. This is something everyone can see.

Second, swiping a card is incredibly easy, but behind it lies an interesting behavioral finance theory. Psychological research shows that money is one of the "emotional dead ends" of humans. 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 quite a lot when paying, especially with cash.

However, when cards were introduced, instead of having to hand over money to the seller, we just had to swipe the card. Therefore, the feeling of "loss" was greatly reduced, we shortened the consideration, hesitation and spent money more freely and generously. Thus, using credit cards can be the cause of spending more and saving less.

In addition, this convenience also has a downside due to the loss of the card or loss of security information, allowing criminals to use the card for spending. Resolving these fraudulent transactions always takes time and the cardholder does not always recover the lost money.

Promotional programs

As analyzed above, credit cards have an important function of stimulating consumption. To perform the above function, consumers must first accept to use the card. From there, annual fee waiver programs and cashback programs are introduced to invite customers to use.

The market has recorded many programs that, if used properly, will bring direct benefits to cardholders such as cashback when going to the supermarket, paying tuition fees, paying insurance premiums, and shopping on e-commerce platforms.

Expense management method

Using a credit card is using a consumer debt. There are two types of debt, good debt and bad debt, depending on the purpose and method of the user. The decision to use a credit card or not, the basic thing is not the convenience or preferential programs for the card, but the method of spending management.

As soon as you receive your income, the first thing you need to do is to set aside some savings, also known as "paying yourself" before spending, also known as "paying others". The amount of this amount depends on your income level and the number of dependents. Then, the portion for spending should be classified into essential expenses and need expenses. Essential expenses are mandatory expenses such as children's school fees, grocery bills, rent, electricity and water bills, and insurance. Need expenses are expenses for enjoyment such as eating out, traveling, beauty treatments, and shopping for other non-essential items.

For essential expenses, whether spent in cash or by card, it still doesn't make us "spend more". Therefore, you can use a credit card, as long as you remember the payment deadline (the issuing bank will send you an email or text message to remind you about this). Not to mention, the card's incentive programs focus quite a lot on essential expenses such as going to the supermarket, paying tuition, and paying insurance.

However, the easier it is to pay for essential expenses, the more careful we must be when using credit cards to pay for indulgences. Some tips to limit these expenses are to set a maximum budget of no more than 15% of income, or wait a few more days to be sure about the products and services you choose to buy, and use cash instead of cards to limit shopping just for convenience.

Thus, if you are a good budget manager, know how to allocate a reasonable budget for essential and need expenses, you can fully take advantage of the benefits that credit cards bring and limit the disadvantages of using cards.

To form the habit of spending and paying off debt on time, you should start with a card with a limit of 1-2 times your monthly income. Regarding the choice of card, you should consider which expenses account for a large proportion of your budget to choose a card with incentives for that area.

Nguyen Thu Giang

Personal Financial Planning Expert

at FIDT Investment Consulting and Asset Management Company

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