Are Credit Cards The Enemy? PART 2 - BOD010

0:00Pete:E, then what days? The closest I can get to that would be like when mum would give us the Argos catalogue like two weeks before Christmas and get us to circle things. Yes, I know that. I'm a genius. I know all things. Well done, me. Hi and welcome to the Bank of Dad podcast. I'm Kate and this is my dad Pete. Hello. And we're here to teach you all the money lessons that we were never taught at school. There's no judgment, no jargon, just real talk about how to handle your money. Here we are again, number 10. 10 double digits. That's cool. Actually, it feels like it's gone quite quick. We did a load before we launched, didn't we?

0:38Pete:Yeah, I think we did the first four. Yeah, something like that. But yeah, it doesn't feel like we've done 10, but it's good though. That's a good thing. We're enjoying it. For sure. What did we talk about last week? Last week, we began our two-part series on credit cards. And as I titled it, and the title will continue for this episode, are credit cards the enemy? That is the question we are answering. And last week we focused on the basics and what a credit score is. We talked a lot about credit score. It's an important sort of underlying thing. So that was good. There's more to cover though.

1:11Pete:So we're going to crack straight on this week. Starting as always with Wanky Word of the Week. It's time for Wanky Word of the Week. That was great. Yeah. Cool. what is this week's wanky word of the week, Kate? This one might be the wankiest yet. I didn't realise there was a scale of wankiness. Okay. Oh, yeah. Okay. There's a scale of wankiness. Right. 100%. And this is high. This is high. Yeah, yeah. And I'll circle back as to why in my mind. But the phrase is APR slash APR representative. Two slightly different things, actually. So APR stands for annual percentage rate. Right. and it's describing you know the interest or the cost of any debt that you take out so obviously specifically we're talking about credit cards yeah but you'll see it it's it's designed to kind of summarize the total yearly hence annual cost of borrowing and it's expressed as a percentage so it'd be like apr 29.9 percent right well that'd be dead easy if it was just the interest right the whole point of apr is that it includes interest rate and it includes like compulsory fees so if for whatever reason there was a you had a credit card that had an annual fee some do most don't but if you did that would be included in the apr right right the whole point of it is to firstly give you kind of a complete picture of what it costs to borrow not just the interest that you'd have to pay but also it's helpful for comparing different kinds of credit products.

2:49Pete:So it's designed to kind of standardize the cost of borrowing. So you can say, right, if this one's 30 % and that one's 20%, this one is objectively cheaper. But it might not be quite as simple as that because in the 30... There might be sneaky charges on one and that kind of thing. It might be that the interest rate on the 30 % one is actually only 15, but there's a ton of hidden charges. I'm exaggerating. Yeah, yeah. Right? And if they just showed you the 15%, you'd think, well, that's better than the 20 % one but actually when you add all the charges in it's 30 % APR so it's designed to kind of standardize measuring the cost of borrowing for a year so you can compare now APR representative which you see all the time yeah is very often the interest rate that you are offered like on an advert say yeah might be different from the interest rate you actually get when you apply Why?

3:44Pete:Maybe your credit score isn't very good. Oh, so it's this unless you have reasons for it not to be. So this is what we give the average person. That's the representative APR. Your APR may be higher or lower. In fact, only about 50 % of people who apply for credit get the actual representative APR. Huh. So there you go. That's interesting. And it's funny you said adverts. That's where the wanky thing comes for me because I remember being... This is weird. I remember it from our first house. In Lefra? Yeah. All right. So I was what? Well, you were, we moved away in 2013, so you were 10 when we left.

4:2010 when we left. And I remember we watched, we were watching something on TV, like BGT or something, and the advert break came on.

4:27Pete:I feel like this is going to be a damning in my parenting. It's not at all, it's not. But there was an advert where there was a particularly high APR. It was probably a payday loan, was it? And I remember going, you said something like, God, that's how they get you. you made a real comment on it and I don't remember I mean I was 10 I didn't even understand what you did let alone what APR was so but that I can picture it so clearly in my mind can you really that you were so adamant like you were just like god that's a mad number and you were really not happy about that and how how pretty they made it look I might be wrong but I don't think payday lenders can advertise on telly now but I remember you'd see you know they make it look great well it might not be a payday buried in the small print it was like APR, I mean I've seen APRs of four digits, so more than a thousand percent, which is bonkers, right?

5:16Pete:But a payday loan you're meant to pay it off in a month, right? So if you actually, remember APR is annual, so if you get a really high interest rate, but if you make it last a year, if you're still owing a year, you will have paid a ton of interest. Yeah, but it's funny, that's funny, that's really stuck in my mind. Yeah, that's the sort of thing you have to tiptoe around when you're parenting, you never know what's going in. What children remember, yeah. All right, so let's get into the main body of it, shall we say. So the first kind of section is like costs, interest, debt, that kind of thing.

5:45Pete:Okay. So how do, let's write back to the basics, how do credit card companies make their money? By charging you interest mostly and also charges. So sometimes, you know, they may charge you a small admin fee to close your account once you've paid it off. they may there may be other sort of charges involved there's certainly charges if you miss a payment so they kind of want you to be on paper they'd say we want you to be a good borrower because they get the interest and they don't have to deal with all stuff of you being late and all that sort of stuff if you are late they may send you extra letters there's admin costs for them but they'll charge you for that That's the point.

6:32Pete:So they make their money primarily by charging your interest, but then also on charges. Yes, because if everybody just paid back what they borrowed, then they'd be in zero. No, exactly. Well, yeah. If you sort of borrow and fully pay off every month, they're not actually making very much of you. No, whereas. But that's not normal. It's extremely lucrative business lending. I mean, they make a shit ton of money. Sure. And they're doing it because. There's far too much math involved for me. Well, yeah, I mean, I wouldn't want to do that. But remember we said right at the start, if you are, I'm sure we've said it only here, if you're borrowing money, you're making other people rich, not yourself.

7:08Yeah, we have.

7:09Pete:Right? And so there's money to be made in lending money to people. Yeah, of course. Interesting. Mm-hmm. Okay. Interest. Lol. Well, actually, I can't laugh at you because I made a similar joke last, in the outro of the previous one, so it's catching. Okay, so why do interest rates vary so drastically across different cards and different companies? Okay, so a lot of it, as we talked about last week, is your credit score and your credit report, which sits underneath it, which is all that sort of information behind the score. The score is just kind of a summary of it. So if your credit score is worse, you are a bigger risk to the lender.

7:54Pete:so they will offset that. They will kind of make up for that higher risk. They'll still want to lend you the money because they make money out of you. Yeah. But to offset the risk, they will charge you more interest. Right. Right? So remember, APR representative, this is what we offer the general person. But if you're a higher risk, we're going to charge you more interest. We'll give you the money, but we're going to charge you more. So some of it is, you know, your credit score. Some cards are specifically there to help you build up your credit score. We mentioned that briefly last week. and because you are kind of not proven you are by definition a higher risk could go any either way so they are on the side of caution and they'll do that by charging more interest there are some credit cards that are interest free but for a period that's kind of like a traction thing to gain customers yeah thank you cut that word completely escaped me it's an incentive for you to join and open a credit card with that company you can even transfer balances So if you're paying interest over here, you can transfer it to a new interest-free card.

8:55Pete:There's always a charge. Yeah, to open the card or something, surely. No, exactly. So, you know, it's a sort of, yeah, an incentive to entice you to join. But the hope, of course, is that you don't pay your balance off while it's interest-free, that you'll still have a balance once they start charging your interest, because that's always a period. Yeah. Interest-free for 15 months or nine months. Yeah, a weird amount. easy to forget yeah right exactly so he's like obviously the goal is you pay it off but for them the goal is that you'll still have a balance at the end so much in finance banking lending all that sort of stuff relies on inertia the fact that we don't change often enough we're just like I can't be honest I can't be bothered shopping around for the better interest rate or whatever I certainly can't well I know but the banks rely on that yeah and you know you can save a lot of money and interest by shopping around.

9:51Pete:Same with mobile phone contracts, utility bills, broadband car insurance, all that sort of stuff. My car insurance is due. When? My birthday. Yeah, I'm not driving around in an uninsured car. A week ago. Not that stupid. Crikey. Glad to hear it. Okay, so interest rate is a key way to differentiate and to attract borrowers. Cool. Oh, damn it. I said cool. Oh, did you? I think you only did it once after you stopped yourself last time. I only said it once. So let's hope now this is my episodial cool. Okay. You know, I was trying to think of a word like annual. That's your cool for this episode. Yeah, it's not flowed as well.

10:33Okay. What happens if you can't pay your credit card bill? We did kind of touch on this last week.

10:38Pete:If you can't pay it, it's different to you forgetting to pay it or you can't pay it all off this month. All right, let's go with forget. first if you forget then you need to make sure you remember going forward automate things like minimum payments at very least going out automatically by direct debit so you don't miss yeah you don't want to miss your payments so you don't want to miss multiple payments so if you just forget you need to fix it and make sure you don't forget in future um if you can't pay it you lose your job say and suddenly you're like okay right now we're in trouble. So assuming you don't have an emergency fund, this is why we have that, right?

11:22Pete:Then suddenly you're in trouble. You owe money to a credit card company and you have no means of paying it off, right? You're just about making your rent or your mortgage or whatever, but there's no way you're going to have money to pay debts off. Obviously, that should be a very high priority. You should keep a roof over your head. But if you can't pay it, the first thing you need to do is to get in touch with your credit card company. Right. And tell them, I'm going to have real difficulty making a payment this month because this has happened they are legally bound to do everything they can to help you which is we talk a lot about on the debt episode yeah yeah so you know if you fall behind and if you stay behind you will eventually be declared in default okay in other words you've breached the terms and conditions of them lending you the money yeah you can't pay the minimum that you agreed you would right so you have breached your side of the contract you've broken your side of the bargain essentially and then they have powers in that contract to potentially declare you, apply to have you declared bankrupt to maybe come and take stuff, you know, repossess some things if you've bought something on a credit card or whatever.

12:31Pete:Doesn't usually happen, but you know, they can send bailiffs around and start saying, okay that TV in the corner, I can sell that for 250 quid, I'm going to have it. You don't want to get in that situation, right? That is quite a long way down the line, proper scary but it happens. so if it's a problem the first thing you do is you reach out and you get hold of your credit card company and if it gets really bad and if you've got multiple debts and you get further and further behind then you need help and we talked about Christians Against Poverty brilliant organisation and the other one is called Step Change and there was the general government one oh the Citizens Advice Bureau that's one I'll link all of those again and I'll link the episode on debt yes good shout in the show notes which will be bankofdad.show forward slash episode 10 amazing so yeah that'll all be there so that's good to know what happens don't bury your head in the sand no be proactive get ahead of it before it gets worse as soon as it becomes a problem get on top of it so that kind of concludes that section and leads us into the myths and legends sections myths and legends or myths and legends myths and habits I quite like myths and legends though do you like fantasy novels I do yeah I do okay myth one a credit card is just free money then felt like it when I first had mine.

13:46What was your first credit card purchase? Do you remember?

13:49Pete:A pair of jeans. Levi jeans. Was it? Yeah. So this is just before I went away to university, like the weekend before I went to the HSBC Bank, Midland at the time, and opened my student bank account, typically last minute, right? But literally the guy went into the other room and came out with one access card. It doesn't exist now. It's called MasterCard. And one visa. So I had two credit cards given to me, 250 quid limit on each. that felt like free money 250 pounds that is nothing no but this was 1994 okay so it was more than that is but you know it isn't very much but it was enough for a student exactly and so i thought great i bought a pair of jeans and i paid it off the end of the month and then i bought a little bit more the following month and didn't pay it all is that the credit card version of lifestyle creep yeah it was too easy right and i was never given any instruction either by my parents or by the bank.

14:44Pete:I was just given these things. So it felt like free money, but clearly it's not. Interest. Nobody, no such thing as a free lunch is the phrase, right? Nobody does anything for free. Definitely not in finance. No, charities and things, but yeah. Yes. But I mean, they don't dish out money to people on the streets, right? They're there to help people who are in need, right? Yeah, yeah. But credit cards is 100 % not free money. It's very expensive money because the interest rates are generally very high. So do not treat it as free money. No, and it's not your money. It's other people's money. That's quite a good way to imagine it, actually.

15:21Pete:Yeah, it feels like your money because you can't score your name on it. And when you go like, it goes through. Oh, I have a nice thing. And I have a thing now. It's not free. It's not yours. It's not your money. And generally speaking, you should avoid using other people's money unless you absolutely have to. So it's definitely not free money. That's 100 % of me. Let's get rid of that myth. Okay. Do you need a credit card to build a credit score? No, but it helps. Because it's a kind of fluid kind of debt, you know, where you get a facility and you can borrow off it and you can pay it back or you can borrow a bit more and then you pay it back.

15:59Pete:Or I had to borrow quite a bit, so I'm going to pay it off over two or three months. That kind of flexibility, if you can handle it well, it bodes well for your credit score. It reflects well on you and your spending, doesn't it? So as always with old debt, tread carefully, right? But yes, it can be useful for helping you build a credit score. But please understand, debt is like fire. You need to handle it carefully. Yeah. Right? Because if you lose control of it, it's very unpleasant very quickly. It's going to spread. Very unpleasant very quickly. So I don't want to kind of, I think some people in my profession and sort of online infos and stuff, the one that comes to mind is a guy called Dave Ramsey in the US, right?

16:46Pete:And he's like, all debt is bad. That's too black and white. And in the current world, it's hard to get by without at least some debt, and particularly early on. And obviously most of us need a mortgage, right? Mortgage, that's what I was going to say. so debt is can be useful if you handle it well but you must try carefully you must be careful we can't kind of belittle the fact that it's super easy for it to turn from it being fine and easily handleable to suddenly it's all consuming and we're spiralling and I'm in trouble in deep trouble yeah so I suppose with credit not having a credit card to build your school other ways that would still be building your school are like the regular payments you have that you pay anyway way like your phone or vet insurance and vet bills or whatever it is that is still improving your credit oh yeah definitely if you think about a credit card contract is essentially a debt you're paying for your phone and all your air time over two or three years aren't you yeah i suppose so you know most of us don't buy a phone outright no we pay 50 quid a month or whatever and get a phone but we have a three-year contract so it's a form of debt no doubt about that so that's a way a car Payment, yeah.

17:55Pete:Overdraft, try and avoid overdraft. It's very much bad debt. But personal loan and obviously mortgage. So all debt, if it's managed well, will improve your credit score. It doesn't have to be a credit card. But I was just thinking of non-credit card examples. Yes. That would be, and those sort of regular payments. Yes. Lovely. So is it smart or is it okay to use credit cards for day-to-day spending or are there specific purchases you should not pay with a credit card? no and you know if you are really in control of it it can be beneficial to use credit card for day to day spending a lot of credit cards will give you like points so you might have a credit card that's linked to your nectar account for example and if you if you bought you know if you if you drive a lot and you put in three or four hundred quid with a petrol on your credit card and you get nectar points for that what you might get i mean i roge my former business partner co-host of meaningful money.

18:49Pete:He used to put everything on his Tesco credit card because he got points, and then you could triple them and get holidays and stuff. What? I know. So you can get air miles on credit cards, right? But this is not for somebody who's just buying a credit card and out of desperation. Yes. This is careful management. You can use other people's money to benefit yourself. There's no doubt about that. Generally speaking, we call that leverage. we'll get into that in another episode but even if you're benefiting yourself just with points or you build up nectar points and you spend them all at Christmas I was going to say that's what you do isn't it that's what your mum do I need to get my own nectar card because the one I've got in my purse is yours yeah thanks so whatever I use it goes to your yeah you are around for Christmas day usually so you do benefit I wasn't last year no you weren't me first time so it's okay to use it as long as it is But just be intentional, the golden rule, pay it all off, right?

19:49If you're going to use it for day-to-day spending, you know, you need a budget and say,

19:53Pete:okay, right, I'm going to spend my food and my fuel on my credit card, but I know what it's going to be and I'll pay it off at the end of the month because I have the money for it. And obviously you can set a direct debit to fully pay off the thing every month anyway, so do that. If you can. If you can, yeah. Don't get yourself in. Yeah, anyway, yes, if you can. Are like rewards and cashbacks worth it? Yeah, it can be. What is a cash back? What is it? It's where they give you cash back for spending money on the credit card. So it's usually a deal between the retailers, the shops, and the credit card companies.

20:28Pete:You know, for every£100 you spend with, I don't know, boots, they'll put£4 back on your credit card or something. It's literally cash back. It's not actual, you know. Nobody rocks up with£4 coins, right? It actually gives you money back for using the credit card. I said that out loud and I thought, I actually don't think I can define what cashback is, so I'm going to ask you. So are they worth it? No, that's why we're here. Indeed. Yeah, I think so. Again, if you use them carefully. It's just a perk. The whole point of these perks is to get you to use the credit. Yeah, don't spend£100 in boots when you went in there for£8 just for the sake of£4 worth of points or whatever.

21:03Pete:No, exactly. And don't spend, you know, a grand and a half on interest to get£75 off your Christmas dinner meal. Yeah, not worth it. You know, that's lunacy, right? But if you've got a£95 basket, chuck in a bag of crisps in them. Yeah, exactly. Get it up to 100. Honestly, I think so many of these perks, it's a little bit smoke and mirrors. It's like, we'll give you this cool stuff over here. It's like sometimes on bank accounts, you say, okay, right, you bank with, I don't know, Lloyd's Private Banking or HSBC Premier or whatever, and you have to pay us 20 quid a month to have this credit card, but we'll give you travel insurance, insurance for your mobile phone.

21:44Pete:It's like, cool, right, so I'm paying 240 quid a year to have 80 quid worth of insurance. Yeah, but it looks so nice when it's tied up in a neat bow. Yeah, right, so it can be kind of smoke and mirrors. Like, ooh, look at the shiny things over here while we shaft you on the other end. They definitely play on the magpie. Yeah, ooh, nice things. New shiny thing. Exactly. Or maybe that's just me. Yeah, well, this is why everybody should, but nobody does read terms and conditions. oh yeah yeah accept it's fine right so just if you if you kind of golden rule is that nobody gives you anything for free yeah and if there's something being offered to you there's something on the back end which is being taken from yeah something has to benefit them yeah sounds obvious but we saw i wouldn't think the best of people yeah you think the best of people maybe not companies.

22:33Pete:Well, no. The financial services industry is basically there to take as much as they can from you. You could argue that about every industry ever. Of course. Yeah, pretty much. Apart from maybe like the medical field. It's the way humans work, right? We, we, that is capitalism. We buy and we sell. Exactly. Capitalism is the best way we have evolved as a species of building wealth and improving the general well-being of the species. Yeah, the lions aren't doing it. No. but for all its flaws it's far from perfect capitalism because there are always losers but it's just it's hardwired, it's how we work yeah it is, alright segue, not really segue if it's really unnatural like this but real life uses yeah, jarring transition segue I'm just going to say, do you know what isn't a segue like a two wheeled handled Yeah, spelled differently.

23:30Pete:Oh, is it? How is it spelled in this case? A Segway. Segway from one thing to another. S-E-G-U-E. Looks like Segu. A Segu and a Segway. It's S-E-G-W-A-Y. Segway. Segway. I don't know if it's true, but I heard that the guy who invented the Segway, the two-wheel thing, died because he drove one off a cliff by mistake. But it's probably absolute nonsense there. Really, you shouldn't laugh, but the way you delivered that is so dead. I might be wrong about that, but I did read that. That's funny. I hope I don't get sued. So, real life users. We really do hope that the convention of the Segway is alive and well.

24:08Pete:Yes, exactly. Okay, should you use your credit card when travelling abroad? You can do. They're not all created equal, so you should check the terms on yours. So some of them will say no fees for use abroad. Okay. Which is kind of pretty clear. That's what you want, yeah. One trap that's easy to fall into if you spend money abroad is often with your card. Yes, thank you. Is when you, you know, they put the number up on the machine and they ask you if you want to pay in your home currency or the local currency. So if you're in France, it said you want to pay in euros or pounds. The answer is always local currency.

24:46Yes.

24:47Pete:Because, do you know why? I think I might have talked to you about this. You've talked to me about this, but like before I went on traveling to Italy and whatever. Because that way you're not paying their conversion rate. Yeah, you're using your bank's conversion rate, which will certainly be preferable. Yeah. Because the conversion rate being used by a little shop in Italy could be anything. And they don't have the scale that the banks do, so it's probably going to be a worse exchange rate for you and better for the shop. Because if you use your banks, it will normally be better for you. So if you get the choice, always pay in the currency of the country you're in.

25:22Pete:Local currency. But generally speaking, as long as you check the terms and there isn't obvious fees for paying in a different currency or in a different country, then yeah. And it's often better to do that. You know, you can check your spending when you come back, check your statement, pay it all off or whatever. As opposed to carrying loads of cash around, right? Yeah, right. Now, this is a fun one because you didn't know it, right? Nope. So, what are Section 75 protections and how do they help me? this is where my research pays off more than yours Kate researches the subject it puts a lot of questions and before we start recording I check them and sometimes I think I have no idea and so I better do some research and I had no idea what section 75 protections were but the name refers to section 75 of the Consumer Credit Act 1974 right yeah slips off the tongue what it does is it makes both the credit card lender and the retailer the shop you buy the thing from yeah jointly responsible for that person purchase.

26:22Pete:So, and between£100 and£30 ,000. So if you buy something on a credit card, you're not going to buy much more than that. No, hopefully not. Don't buy a car with a credit card, right? Well, maybe. So if the thing you buy is faulty, or if you buy it online, I think they said mail order then, who does that now? If you buy it online, you don't even know what mail order is, is it? Well, it's ordering through the post.

26:49Pete:You and you'd write it down, send off an order form, and it'd come back. Eee, then what days? The closest I can get to that would be when mum would give us the Argos catalogue two weeks before Christmas and get us to circle things. Or the Argos catalogue. But then she would do it online. It's all touchscreen, isn't it? Well, probably. Anyway, so, if you buy something online... I mean, Father Christmas' elves would make it. If you buy something online, or whatever, and either it doesn't show up or it's faulty, then both the credit card company and the shop you bought it from are jointly responsible.