Credit Cards Unveiled: The ‘Basics’, The ‘Good’ & The ‘Be Careful’

CreditSmart’s Deep Information Dive

“Sixty-one percent (61%) of our 2023 ‘Financial Savvy’ survey respondents said they use their credit cards every month and lay awake stressed about their financial situations. A lower, 39%, confirmed they do not have a credit card and are not overly stressed about their finances. Is it a coincidence? I would say it’s about how you handle these little plastic cards that can either help or hurt your pocket and up or lower your stress levels,” explains Wikus Olivier, managing director at CreditSmart Financial Services.

Here are a few vital touch points that can help you, the consumer, to get to know the basics of a credit card as well as the benefits and pitfalls you may run into:

Credit Cards Simplified:

A credit card can be your financial helper. It can help you to manage your cash flow and cover unexpected expenses or big purchases. To get one, you typically need to be old enough and show the necessary documents like your bank statements, salary slip, proof of residence, and identity. When it comes to this credit facility, repayment is required within a certain time, either in full each month or over several months through minimum (smaller) payments. Keep in mind that if you opt for the minimum monthly payment, interest will be charged and added to the outstanding balance.

When Using the Straight / Budget Facility:

You can choose to buy something with your credit card by using one of two options:

• Buying on ‘Straight’: When making a purchase on your ‘straight’ facility the full amount of your purchase will be included in the calculation of your agreed to monthly repayment. If you pay your full ‘straight’ balance back (generally) 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 instalment rate on a reducing balance). For example, usually anything from 3 to 60 months. The monthly instalment 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 period you choose, the lower the monthly payment BUT the higher the interest.

The Minimum Payment, How Interest Works & Potential Fees:

Each bank may have a different minimum payment requirement, so it is essential to understand the details of your credit card. Paying less than the required minimum may result in late penalties and possible credit score harm. As a result, it’s a good idea to use your credit card sensibly, know how the extra charges (interest) pile up and make sure you keep up with your payments.

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

Fees commonly associated with credit cards can include anything from changing your credit limit (upon request), the interest-free grace period on select transactions, and a customised interest rate. Don’t forget to look out for fees that might 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, monthly account fee, facility or administration fee, incentive programme fee, transaction fee, and a credit life cover (insurance) related charge.

Picking the Right Credit Card for You:

When it comes to credit cards, it’s like picking the perfect tool for the job. A well-chosen card can help in different ways:

• It can be your safety net for surprise expenses.
• Some cards offer perks like purchase protection and giving you rewards.
• Using your card responsibly can help boost your credit score.

To find the right fit, think about your needs, lifestyle, and budget. Do some research when choosing a card, and consider the fees, interest rates, and plusses involved. Figure out if you need a basic card or one that gives you specific rewards. When you pick a card that fits you, and your style and use it wisely, you can make a positive impact on your finances.

Mastering Your Credit Card:

To get the most out of your credit card:

• Track Your Spending: Keep tabs on your monthly credit card purchases to stay on top of your expenses. 
• Spend Within Your Means: Only spend within the limits of your income and what you can comfortably afford to repay.
• Understand the Terms (&/ Conditions): Familiarise yourself with the interest rate and terms of accessing credit of the card you are using/going to use.
• “The golden rule? Pay it off in full every month IF you can. It keeps stress away,” highlights Olivier.
• Maximise Rewards: Credit cards often offer rewards programmes, allowing you to earn points or cashback. To make the most of these programmes, understand the terms and conditions of the programme to qualify for rewards, transforming your expenses into valuable benefits.

Keeping Your Money Safe & Avoiding Scams:

Protecting your card is very important. Here’s how:

• Never tell anyone, not even a family member or friend, your card’s secret PIN.
• Keep your one-time passwords (OTPs) all to yourself.
• Watch out for online scams. Don’t give away your personal info or click on any suspicious e-mail and SMS links.
• Set up alerts for every card transaction as this will allow you to act and report it as soon as possible.
• If you shop online a lot, change your passwords often (referring to the online shopping sites or platforms that you use).
• Make sure to scan through your credit card statements regularly for any sneaky purchases.

Credit Card Pitfalls: How Debt Sneaks In:

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

• Growing debt: If you don’t pay your credit card bill in full each month, you may incur interest charges on your outstanding balances. This can quickly lead to out-of-control debt.
• Mixing Old Debt with New Transactions: Do not use your credit card for new purchases while you still have an outstanding balance. Doing this can make your debt harder to manage because you will have old and new debt in the mix that you must pay off. It can also increase the interest on your card which will grow over time. Rather use your credit card like a loan with a beginning and an end. When you buy something on your credit card pay it off before you use it again.
• Falling 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’ll pay.
• Don’t Spend More Than You Can Afford: Credit cards can create the illusion of never-ending money. Be careful not to overspend and spend more than what you can afford to pay back on a monthly basis. This can cause your credit card debt to grow out of proportion and paying it back is a struggle.
• Emotional Spending: Many times, you will buy something because you really want it in the moment as it makes you ‘feel better’. Do not use your credit card for retail therapy as this can lead to overspending and an uncontrolled spiral of debt to follow.
• Interest Charges and Fees: Pay attention to the interest that you are being charged and the fees associated with your credit cards. High interest rates and hidden fees can significantly impact the cost of using your credit card.
• Watch Out for Promotions and Reward Traps: Many companies often offer tempting rewards and promotional offers. While these ‘deals’ may seem too good to be true, don’t be tempted to spend more than you can actually afford just to earn rewards. This can easily lead to uncontrolled debt.
• Not Having a Budget: Putting a budget together and only spending what you have planned for can help you manage expenses and use your credit card when it is only necessary.  No plan (budget) can lead to a debt mess and stress.

“Recent TransUnion statistics show a concerning rise in outstanding credit card balances. Some rely on credit for essential expenses, and this can cause more financial stress. To keep your finances in check, monitor your card balance, avoid maxing it out, don’t use it for ‘everyday purchases’, and pay off your full balance if possible. Use your credit card wisely, and you’ll enjoy a debt-free, stress-free financial journey,” concludes Olivier.