Credit cards: You need to understand the basics of these little plastic cards

You may think that a credit card can be handy for unforeseen expenses, but you need to understand that there are benefits and pitfalls to having one. Picture: Freepik

You may think that a credit card can be handy for unforeseen expenses, but you need to understand that there are benefits and pitfalls to having one. Picture: Freepik

Published Oct 18, 2023


61% of people who use their credit cards every month and lay awake stressed about their financial situations, according to the 2023 Financial Savvy survey by CreditSmart Financial Services,

While 39% of the respondents in the survey who do not have a credit card said that they are not overly stressed about their finances,

Wikus Olivier, managing director at CreditSmart Financial Services, shares information on the basics of a credit card as well as the benefits and pitfalls of having one.

Credit cards simplified

Olivier said that a credit card can help people manage their cash flow and cover unexpected expenses or big purchases.

To get one, you typically need to be the right age as well as show documentation like your bank statements, salary slip, proof of residence, and identity.

With credit cards, repayment is required within a certain time, either in full each month or over several months through smaller minimum payments. Consumers need to keep in mind that if they opt for the minimum monthly payment, interest will be charged and added to the outstanding balance.

Using the straight/budget facility

When you are paying for something with your credit card, you have two options:

Buying on straight

When purchasing on the "straight" facility, the full amount of your purchase will be included in the calculation of your agreed monthly repayment. If you pay your full "straight" balance back within 55 days, you will not pay interest on the money you used on credit.

Buying on budget

When you are buying on ‘budget’, you must choose the period you want to repay the full amount, with a fixed installment rate on a reducing balance.

The monthly installment for your "budget" facility will be paid from your "straight" facility, and only that portion will be included in the calculation of your agreed monthly repayment with the rest of your "straight" facility. The longer the period you choose, the lower the monthly payment, but the higher the interest.

Minimum payment, interest and potential fees

Remember that paying less than the required minimum may result in late penalties and possible credit score harm.

If you pay everything you owe every month before the due date, you won’t have to worry about interest rates. If you don’t, you will pay extra for the money you borrowed and whatever new purchases you make.

Fees commonly associated with credit cards can include changing your credit limit, the interest-free grace period on select transactions, and a customised interest rate.

Other fees may pop up if you pay late, withdraw cash, do a balance transfer, or spend more than your limit. There could also be an initiation fee, a monthly account fee, a facility or administration fee, an incentive programme fee, a transaction fee, and a credit life insurance-related charge.

The right credit card for you

When it comes to credit cards, it’s like picking the perfect tool for the job. To find the right fit, think about your needs, lifestyle, and budget. Do your research when choosing a card, as well as consider the fees, interest rates, pros, and cons involved.

You should decide if you need a basic credit card or a credit card that offers you specific rewards.

Mastering your credit card

To get the most out of your credit card:

– Track your spending by keeping tabs on your monthly credit card purchases to stay on top of your expenses.

– Only spend within the limits of your income and what you can comfortably afford to repay.

– Understand the terms and/or conditions by familiarising yourself with the interest rates and terms of the credit card.

– Take advantage of the credit card’s rewards programmes that allow you to earn points or cashback, and ensure that you understand the terms and conditions of the rewards programme.

Credit card pitfalls - how debt sneaks in

Here are some common traps or pitfalls to be aware of:

Growing debt

If you do not pay your credit card bill in full each month, you may incur interest charges on your outstanding balances.

Mixing old debt with new transactions

Do not use your credit card for new purchases while you still have an outstanding balance because you will be mixing old and new debt. This will also increase the interest on your card.

Rather, pay off your credit card before using it to buy something else.

Don’t fall into the minimum payment trap

Making only the minimum payment needed each month might seem easy, but it just increases the time it takes to pay off your debt and increases the total interest you will pay.

Don’t spend more than you can afford

Be careful not to overspend and spend more than you can afford to pay back each month. This can cause your credit card debt to get out of control, and you will struggle to pay it back.

Emotional spending

Do not use your credit card for retail therapy or to make yourself feel better because this can lead to overspending and an uncontrolled spiral of debt.

Interest charges and fees

Pay attention to the interest that you are being charged and the fees associated with your credit card.

Watch out for promotions and reward traps

Many companies often offer tempting rewards and promotional offers, but don’t be tempted to spend more than you can actually afford just to earn rewards on your credit card.

Not having a budget

Putting a budget together and only spending what you have planned for ensures that you only use your credit card when necessary.

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