Credit cards: Are they evil, or a useful money management tool when used correctly?

That largely depends on your financial situation, your lifestyle and how disciplined you are about paying off the balance each month.

When to avoid credit cards

Hard Line Wealth partner Cody Harmon said some people want a credit card in case of an emergency, but he recommends saving three months’ worth of living expenses instead.

He said credit cards encourage people to spend more than they earn and that this can be a recipe for financial distress.

If you rely on a credit card to cover a large unexpected expense, it can be hard to clear that debt, which can compound at a rate of up to 20 per cent.

“Instead of operating off emergency funds, you’re using a credit card and you start to get put in a position where you’re in a bit of strife,” Mr Harmon said.

“That is very, very difficult to climb out of.”

The more expensive credit cards have annual fees of almost $1500 and offer holders perks such as frequent flyer points, shopping credits and hotel accommodation upgrades.

When they can be useful

Mr Harmon said credit card benefits such as frequent flyer points can be worth it for some people but only if they have a track record of comfortably paying off the balance each month.

“If you like your credit card, you get good points, you’re disciplined and you’ve never had a problem with it, you might not get rid of it … some people can manage that situation,” he said.

Keep your credit card in the black

Topping up your credit card each time you’re paid and using it like a debit card – so you are always in credit rather than debt – can be an effective way to manage your cash while collecting benefits.

“People don’t like being told, ‘You’re a naughty girl, you’re a naughty boy, get rid of your credit card’,” Mr Harmon said.

“If you’re disciplined and you always clear it every month and that works for you, work with it being in a credit position.”

What about my credit score?

Mr Harmon said in Australia you don’t need a credit card to have a good credit score.

If you are applying for a mortgage with a 20 per cent deposit, genuine savings and can show you will be able to service the home loan, you do not need to have been making credit card repayments.

“You’re more likely, statistically, to have a bad credit rating if you get a credit card and … fail to meet your repayment obligations,” Mr Harmon said.

Where can I find out my credit score?

You can access your credit score for free by contacting credit reporting agencies such as Experian or Equifax.

If you need help managing debt, you can access free, independent advice by contacting the National Debt Helpline on 1800 007 007.