Andy Boyd, co-founder of Australian credit card comparison website, CreditCardCompare.com.au, gave us his thoughts on the subject, which we've included below.
How it Can Work
Pay your statement in full: If you use a credit card correctly, it is possible to save money and live a frugal lifestyle. The first thing that you have to remember is that you need to pay off your balance at the end of each month regardless of what else is going on in your financial life. The problem that people run into with credit cards is when they allow balances to accumulate and then they start paying interest. If you use your credit card to make a purchase, it's similar to paying cash for an item. It's not until you start paying interest on that transaction that you start hurting yourself financially. The interest essentially adds to the cost of the total purchase and makes everything more expensive.
Earn rewards for spending, including cash back: Using a credit card can also work your advantage when you combine large purchases on your card with a good rewards program. Some credit card rewards programs are actually pretty good and can give you a lot back in exchange for your business. For example, if you make strategic purchases on your credit card, you may be able to get a free airline ticket out of the deal at some point. If you always pay off your credit card balance each month, your not paying anything extra for this airplane ticket. This saves you quite a bit of money on the cost of a vacation.
When it Doesn't Work
Annual fees: Although credit cards can be a useful tool in the hands of someone frugal, they can also be a nightmare. If you get a credit card that charges a high annual fee, you'll essentially be throwing money away to the credit card company just for having an account. Since you will be paying off your credit card balance at the end of each month anyway, you could theoretically agree to a credit card with a higher interest rate if that's what it takes to get rid of the annual fee.
Interest on purchases: The theory also does not work if you allow the balances on your card to stay there from one month to the next. If you do this, it won't be long before you have thousands of dollars in debt sitting on your credit card accounts. When that happens, the interest charges really start to add up. Before long, you'll be using any extra money that you have to pay down the debt that you owe the credit card companies. This gives you less money to spend on everyday expenses and it will be difficult to make ends meet.
No discount: Another problem that comes with using credit cards regularly is that you may end up paying more money for the things you buy. Some businesses will give you a discount when you pay with cash. Businesses have to pay a percentage of the transaction fee if you pay with a credit card. If you get rid of the card on the transaction, the company may be willing to give you a cheaper price. This may not come into play when buying groceries, but on bigger purchases, this may definitely be a factor. It could save you hundreds of dollars every year if you make enough purchases.