We Should Spend More On Our Credit Cards

We're often told that our credit card spending is out of control. But if we were truly Foolish, we'd use our credit cards much more than we do at the moment.

Britain is an evil nation full of credit card junkies.

That is at least what we are led to believe. My view is a little different - I don't think we use our credit cards enough. Let me clarify that horrendously reckless statement with the aid of some facts and figures from the latest APACS spending statistics release.

1. Our average credit card debt

Here in the UK, 31.4m people have credit cards. Of those that have credit cards, we have an average 2.4 cards each. The average debt outstanding on each card is £718, or just over £1,700 for each cardholder.

To put that in perspective, £1,700 is equivalent to what we currently spend on our cards in just over five months. Or, put another way, on average we take just over five months to pay off our credit card debts.

Hmmm, that's not too good, especially considering it's reckoned that half of us pay off our credit card balances in full each month. This means the remainder of us are taking almost a year to pay off their debts.

2. Credit card balances are falling

This is where the news gets a little brighter. The total amount we owe on our credit cards has been falling steadily for two years now.

Since 2005 our total credit card debt has fallen from £57.5b to £53.5b, a drop of some 7%. Our spending on credit cards has remained roughly the same, but we've been paying back more. Now whether this is down to good financial habits, or has been forced upon us by banks cutting back on credit limits is hard to say. But it's good news nonetheless.

Looking back a little further, we can see that owed £38.5b on our credit cards at the end of 2000. Why is this date significant? Well, this is when Egg introduced the first 0% balance transfer card. So credit card balances have only grown by about 5% a year since that point. Given that you'd expect credit card spending to at least grow in line with inflation, it looks like we'd haven't been as out of control with our credit cards as you might think.

Personally I find it hard to believe we'd had 0% balance transfers for less than seven years. Incidentally, this year is the tenth anniversary of the first cash back credit card (Alliance & Leicester) and the eleventh of the first loyalty credit card (Goldfish).

3. Soaring cash withdrawals and debit card spending

Yes, I finally I get to the point of my argument!

Unlike credit card spending, debit card purchases have been growing like topsy. We spent £79b on debit cards in 2000. This year, we're on track to spend £220b. This means we spend over 80% more on debit cards than we do on our credit cards.

Cash withdrawals has been growing quite quickly too. In 2000 we withdrew £113b. This year, no doubt partly due to there being 3 cash machines for each person, we'll draw out £180b. So our cash expenditure exceeds our credit card spending by 50%.

So why is using cash and debit cards worse than using a credit card?

Three reasons spring to mind. Firstly, debit card and cash expenditure doesn't let you enjoy the interest-free period you get with credit card purchases (typically around 56 days). Secondly, you won't be able to earn free money by using a cashback card. Last of all, for purchases between £100 and £30,000, we don't get the protection of Section 75 of the Consumer Credit Act, which means the credit card company is jointly liable should there be a problem with what we've bought.

So next time you pay with something by cash or debit card, stop and think if you'd be better off using your credit card instead, provided of course you pay off the additional debt before it costs you any interest!

> Don't forget that you can use The Fool to compare credit cards of every kind.
> What's Going To Happen To Credit Cards?