Credit cards are double-edged instruments: Depending on how they are used, they can stifle some consumers or represent the most attractive payment method for your purchases. This article will cover both aspects (if you are free of consumer debt, you can skip to the next section) before presenting some practical options in a second article (some are available to all consumers, others are typical Swiss examples).
The dark side of credit cards
Credit cards are difficult instruments to tame. When used improperly, they can lead to a spiral of debt and huge fees. Please avoid any debt for current expenses that will put a strain on your budget. However, when used properly, credit cards can provide currency transactions and rewards to those who know how to use them.
Before considering a new credit card, you should make sure that you are free of consumer debt (a mortgage is often necessary and wise in order to invest in real estate). You should consider getting rid of these debts quickly, especially if you have negative car loans or credit cards. Consumer debts can have many negative effects on your life as they will drain a significant portion of your income: In addition, they put you under pressure and increase your stress. Finally, they impact your credit profile, making it impossible to obtain good mortgage rates or favorable credit card terms.
People in critical situations can sometimes defend themselves against issuer default. The Consumer Credit Act requires that a customer’s creditworthiness be summarily checked before a credit card is issued, but this is not done systematically. In addition, cards with too high limits are often issued, even to people with low incomes. Several cantons in Switzerland offer services in this area, notably through the cantonal debt counseling centers (the sources also include a link to a practical help guide).
In any case, if you find yourself in a consumer debt situation, you must stop burying your head in the sand and face the truth.
1. First, you need to get to the bottom of your situation and determine the amount of your debt
Gather your latest debt statements. If you are missing information, contact the credit card companies, make a note of the amount of your debt, the annual interest rate and the minimum monthly payment. Please do this exercise as soon as possible if you are in debt. Even though it is painful and unpleasant, it is important to take action.
2. Second, you need to start planning how to get out of debt.
Once you know how much you owe, the next step is to get out of debt in a disciplined way.
You need to prioritize which debts you will pay off first. To decide which debt you will reduce first, you need to consider the interest rates, the amount and the loan terms (for example, which ones you have to pay by a certain date). To eliminate your debt as quickly as possible, you should start by paying off the loan with the highest interest rate. Some people recommend starting with the lowest amount to motivate yourself. Although small successes have a positive psychological effect, we recommend making a list of the loans with the highest interest rate in order to start with the most expensive debts.
3. Manage your repayments.
In practice, it can be useful to consolidate your credits on a single provider. If it offers better terms, you can save on the interest you pay to other providers or use it to negotiate lower rates (a technique highly recommended in the United States but more difficult in Europe). In any case, this improvement should not encourage you to spend and take on more debt. Select the lowest rates and this consolidation will allow you to simplify your situation and concentrate your efforts. Your goal today is to eliminate all credit cards, because they have led you to this untenable situation.
4. Finally, create a realistic budget and stay the course to avoid going back into debt.
The goal is not to become an extreme frugalist for life, but financial freedom has a price and paying off your debt is worth the sacrifice: you may have to adjust your lifestyle and consumption, at least temporarily: The peace of mind and reduced financial stress that will result is worth it. The peace of mind and reduced financial stress will be worth it. Moreover, this discipline will allow you to improve your situation in the long run and to enjoy the fruits of your repayment work for a longer time.
Once you are out of the debt spiral, stabilize your situation before considering any credit card use (such as the one recommended). After being the victim, it’s time to take advantage of the benefits of credit cards.
Making the most of your credit cards
Credit cards are not inherently bad as some people think. But used improperly, they can put unbearable financial pressure on you. If you have consumer debt, please read the first section of the article above. However, if you have a more stable financial situation, a credit card can be not only convenient but also economical for your spending.
Here are some criteria, regardless of where you live, for selecting your credit card:
1. Trade-off between simplicity and profit maximization
As recommended for more than a decade by the most popular North American references in the field of personal finance and depending on what is most important to you, you will have to find a balance between simplicity in managing your cards and maximizing the rewards (bonus points or cash). Note that the same general rules apply to debit cards, although the rewards are often lower.
If you’re looking for simplicity, choose a single card with cash back or a low forex fee if you’re making foreign currency purchases. You’ll get a percentage back on all your purchases and you won’t have anything to manage or hold back.
If you want to maximize the value of your rewards, travel or retailer (airline, supermarket or hotel) rewards cards are usually beneficial. These cards give you points for each purchase that you can redeem for benefits. Each points system is a little different and redeeming points is always more complicated than getting a simple cash back. But if you go to the trouble and do a comparison on the major offers where you live, you’ll get some value that will make up for the time spent collecting points, especially if you can use them regularly on travel or retail.
Which type of card is right for you:
1. Cash Back Cards
A cash back credit card (see our recommendation) allows you to earn a percentage of everything you spend. Cardholders typically receive between 0.3% and 2% of their net spending as annual cash back on all purchases you make with the card. If your card doesn’t have an annual fee, then that’s what you should use, since it’s like free money. But be careful, this should not be an incentive to buy more than you need.
2. Reward cards (travel, supermarkets)
This is the other major type of credit card with rewards.
Instead of money earned on cashback cards, users earn points or miles. These points can be redeemed for other services and the card often allows for other great benefits: Hotel or airline seat upgrades, free nights for your partner, access to airport or train station lounges. Unfortunately, the membership cards offering the best benefits are often not free, just like the high-end credit cards (black cards or status cards) but with more affordable entry requirements. You also lose flexibility, because to get great benefits, you have to stick with one hotel or airline company, when other offers without bonuses might be more beneficial.
In summary, to maximize the value of your points, get a rewards card. Rewards programs are always better than cash back cards because there is always a percentage of people who don’t spend their points, which allows them to increase the value of their points compared to a cash back program, which has the advantage of simplicity.
You will also need to balance the number of cards you have: The more cards you have, the more opportunity you’ll have to maximize points based on your spending: This way, you will get the maximum amount of bonuses based on your types of purchases. The problem with this approach, if used to the extreme, is a proliferation of cards. The risk is to lose the overview and to have to pay penalties without using the bones. The administration in case of theft can also be a pain and a forgotten card can also cause subsequent losses for the cardholder. So try to always keep an overview of your credit cards and check the balances regularly so that you never pay interest on a negative balance.
A rule of two or three cards (e.g., one supermarket card, one airline/hotel card, and one card for foreign currency conversion) therefore seems reasonable for the following reasons:
1. A card for foreign currency transactions is often necessary, as the best cash-back and bonus cards charge high conversion fees for foreign or internet purchases to compensate for the benefits offered;
2. Many cards allow you to maximize rewards in all spending categories. You can put supermarket spending on one store card and travel on another to earn bonus points on different cards;
3. Consider airline and hotel cards that offer many benefits. If you travel regularly, it’s worth looking into.
For more specific information, please follow the link for our second article on credit card assessment and recommendations in Switzerland
Sources: Grenzwertige Geschäfte mit Kreditkarten, 08.11.2021, Tages-Anzeiger Handbuch KKG - Kreditfähigkeitsprüfung bei Barkrediten und Leasingverträgen, https://www.konsumkreditgesetz.ch