What you need to know before you get a credit card

By Pieter van Zyl
20 February 2016

“It feels as if I’ll never be able to keep my head above water and breathe financially again.”

Wicus Bruwer* (42) from Cape Town has two credit cards. On one he owes R35 500 and pays about R390 in interest a month. On the other he owes R59 000 and pays about R770 a month in interest.

“It feels as if the money is vanishing into a bottomless pit. As soon as I’ve paid off a reasonable amount on the cards another financially difficult period arrives and I have to max out the cards and start all over.’’

Wicus isn’t the only person living like this. “Consumer debt is out of control,” says Gerald Mwandiambira, of the South African Savings Institute. “The average debt per household with at least one credit card is 75 percent of the household’s expenses – and it’s increasing all the time,” he says.

“The ideal is to pay your monthly expenses on your credit card and pay off the debt  completely before you have to start paying interest (usually 30 or 60 days). Transaction fees are sometimes a little less than with a cheque or savings account – but there are annual card fees,” warns Louis van der Merwe, an accredited financial planner from Durbanville, Cape Town.

To help keep track of how much you spend and to see the true cost Louis suggests you use 22seven.com or moneysmart.co.za. You can link your bank account and see in one place all your expenses (including the amount of interest and bank charges).

Interest rates on credit cards are much higher. On credit card debt of R10 000 you’ll pay an interest rate of 20,25 percent and over a six-month period your monthly payment will be about R2 026. Interest can vary quite a lot from client to client.

You can ask your bank if you can pay off less every month on your credit card debt. You may have a good risk profile or at least it may have improved. This will determine whether the bank will grant a lower rate.

Compare the cards offered to you by shops or credit-card companies (Visa and MasterCard are companies that facilitate this method of payment; they don’t issue cards). The best way to apply for an account is to choose cards with the best tariffs, says Lita Epstein, author of The Complete Idiot's Guide to Improving Your Credit Score. Take a look at the credit card page of justmoney.co.za for a comparative calculator for more information. What are the main things to keep in mind before obtaining a credit card?

Benefits

  • You can use a credit card everywhere, especially overseas, but make sure you know what fees are involved.
  • Credit cards facilitate purchases on the phone or online.
  • In emergencies a credit card serves as a financial catching net (when you have unexpected health-care expenses, lose your job or have to repair your car, for example).
  • You can buy things and pay off the cost monthly. Certain shops even offer a discount and you often get points or money back as a reward. You can use points to buy air tickets, for example.
  • How you manage your credit card helps built up a credit history which is necessary if you later want to borrow money to buy a house or car.
  • If you faithfully pay off your credit card debt you could later borrow money at a lower rate of interest. Check your credit score at mytransunion.co.za)
  • Credit cards enable you to keep a record of your expenses and help to better monitor your financial behaviour because you must continually keep in mind your credit limit and how much interest you’ll have to pay on it.
  • Credit cards help in cases of a dispute over mistakes in your account or faulty goods because through your card you can arrange to withhold payment days later. This is possible because it takes a while for the funds to be paid by the company to the shop or service station.

Drawbacks

  • Some users spend more if they have credit cards.
  • You don’t stick to your monthly budget.
  • If you don’t make your payments in time every month, penalties and interest can pile up and put you deeper into debt.
  • If you have a number of credit cards in your name this could frighten off potential money lenders.
  • Too many credit cards can affect your credit worthiness.
  • Studies show that credit cards play a significant role in consumers’ bankruptcy.
  • Credit card fraud can be a source of many headaches.
  • The credit-card contract is binding and if you don’t read it carefully before you sign it you can be held responsible for the debt for many years.

Don’t use your credit card to

  • Pay off other debts.
  • Improve your standard of living.
  • Buy things that aren’t in your budget.
  • Pay for studies (study loans are available at a better tariff).
  • Buy something you could save for and pay for in cash.
  • And finally, don’t have your salary paid into your credit card account (the cost of each transaction can add up fast).

Additional sources: nerdwallet.com, creditcards.com

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