How credit cards actually work and how you can use it effectively

Image: Getty
Image: Getty

Yet, very few consumers really know all there is to be known about how a credit card works and how it can be used effectively. 

Instead, some consumers continue to grapple with misleading perceptions that are widely spread about this product.

Jonathan De Beer, Head of Collections at FNB, clarifies some of these myths:  

  • Credit Cards are bad and cause you to become indebted – of course abusing your credit card could lead to debt issues. But when used correctly, your credit card  can provide convenience and safety through transacting on the account day to day when you need it most.
  • Spending more is good for your credit score – when used responsibly a credit card can help you build a good credit history. In addition, when you manage your spending responsibly it becomes a great tool to earn rewards and benefits.
  • Credit cards have the highest interest rate compared to other loans interest rates on all credit facilities vary depending on your individual risk profile. Using money from a credit card can actually be less expensive depending on the amount, what you want to use it for and when you will repay it back. 
  • Credit cards should just be used for emergencies – a credit card's budget facility could be useful if you want to make a large purchase but it can also be used for everyday purchases. If you prefund your credit card you'll be able to use it like you would use your credit card and you'll earn more rewards.
  • Credit cards are not safe? – this is not true. The onus is on the user to apply all available safety precautions and ensure that the card and pin are safe at all times.
  • You start paying interest from the minute you use it - if you pay the full outstanding amount you owe on or before the due date on your monthly account statement, no interest will often be charged on your credit facility. Lenders often give you up to 55 days free to repay your debt.

However, if you don’t repay the full amount by the due date, the interest-free period is often deferred and interest continues to be charged from the date of each transaction until you pay in full.

Cash withdrawals mostly accrue interest from the date of withdrawal.

When shopping around for a credit card, it is essential to do your homework and know what value, benefits as well as any restrictions that may have been set out by your provider. Therefore, the decision should not be solely based on the credit limit and interest rate you are charged, but also consider whether the card suits your lifestyle and needs.

“If there’s anything you are unsure of or require clarity on the terms of your credit card, it is best to contact your provider instead of relying on hearsay or information from untrustworthy sources, which can often be misleading,” concludes de Beer.

We live in a world where facts and fiction get blurred
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