One of the most common mistakes people make with their money is using financial products they don’t really understand. Like a credit card.
While the concept of a credit card is simple – the bank approves you for a certain amount of credit, you spend it and then pay it back each month – you need to understand how a credit card works to manage it properly and let it work for you, not against you.
Sbusiso Kumalo, Chief Marketing Officer at African Bank, says consumers who are new to credit cards should start with the basics to understand the different types of credit cards available and how each works.
“The main point to remember is that credit is not free. A credit card comes with fees, like interest and service and initiation fees and must be paid back each month. If you know what you are signing up for, you can manage your credit responsibly and improve your credit score too,” he says.
Kumalo elaborates on monthly repayments on a credit card.
“You have the option of paying a minimum amount or paying the balance in full at the end of the month. Paying the minimum is completely acceptable but it is ultimately the most expensive option because it will cost you the most in interest.
“On the other hand, when paying the full balance, you can get up to 62-days interest free on your purchases. This then makes using your credit card a beneficial payment option.
“You must pay at least the minimum by the due date. Any late payments will result in your account going into arrears, which could lead to your account being blocked and access to it being restricted.”
You apply for a credit card as you would a loan or any other type of credit at the bank. The bank will carry out a check on your credit record and affordability and if your card is approved, they authorise a credit limit (the maximum amount available on the card).
The credit limit is determined by factors like your income, debt, payment history and how much available credit you have on other cards.
Kumalo’s three golden rules of a credit card are: 1. Pay your balance off on time every month, 2. Use it for needs not wants, and 3. Avoid “credit creep”.
1. Pay your balance off on time: If you fail to make payments on time, the bank will report this to credit bureaus. Payment history is 35% of your credit score (a three-digit number that indicates how risky it would be to lend you money). To avoid additional fees and damage to your credit score you must pay at least the minimum due each month.
2. Use it for needs not wants: Don’t swipe to fund irresponsible spending and don’t use your credit card to pay off debt. Rather re-evaluate your financial position and ask for guidance from a financial advisor.
3. Avoid “credit creep”: It is not only big purchases that can suddenly saddle you with a large credit card balance. Using a credit card can make purchases feel as if they never happened. Therefore, it is helpful to treat your credit card like you would cash when deciding what you should and shouldn’t swipe your card for. Small impulse splurges push your balance up little by little, hence the phrase “credit creep”.
“Our advice is to always understand the fundamentals – which credit cards are available and how you can use each of these. Never spend more than you can afford. Avoid thinking of a credit card as your money and always remember it is borrowed money that must be paid back – by you,” Kumalo concludes.
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