Credit Cards: The Good and the Ugly

Necessary, Evil or Necessary Evil?

Unless youre Warren Buffet, Bill Gates or Patrick Motsepe, chances are that you will most likely need credit from the banks at some point in your life. In fact, the ubiquity of credit cards has led to banks offering them to people who simply cannot afford them. When used correctly, credit cards can be powerful.

The first consideration of optimal use of a credit card is to pay the debt in full every month AND on time. Paying the outstanding balance means you avoid unnecessary interest payments which the banks would honestly rather you paid. All credit cards have an interest free period in a month. If you pay off your amount owing each month before the end of this period means you would have avoided paying any interest to the bank.

Credit cards are a great vehicle for earning rewards offered by various banks. For example, with FNBs eBucks program, customers are linked to the various tiers depending on the type of credit card they have. The customer earns eBucks each time they spend using the credit card and these can be redeemed later. When the customers earnings increase and they qualify for a credit card in a higher category, say Private Wealth, so does their eBucks earning potential.

Some people are tempted to use the entire credit limit available. This is risky as your credit utilization is increased. The credit score is negatively impacted by a high utilization.

For those who travel a lot, owning a credit card could be the difference between spending hours on an uncomfortable airport bench waiting for your delayed flight and enjoying the comfort of a good sofa with a glass of wine and snacks to go with it.  The benefit of using a lounge at the airport is provided by the credit cards of most banks. FNB offers its premier, private clients and private wealth clients 8 free entries to the SLOW and Bidvest lounges per month.

Using a credit card for small purchases like groceries seems like a non-threatening activity but it can be risky. A discerning customer typically knows they have to pay the loan back to the bank but the danger with many small purchases is that it seems like a trivial amount here and there until 15 swipes of R800 are done. That equals R12,000. The brain is biased into thinking about the now and not the other 6 times that youve already swiped on the card. By the time you do the math and realise that youve spent R12k, its too late as you already owe the bank. What happens thereafter is that at month end you will most likely pay the minimum expected amount and will continue swiping until youre in a spiral. It is rather preferable to use a credit card for big purchases, say for instance a TV or washing machine for R6000 and then plan the number of months to pay it off over. Ensure to not use the credit card on any other purchases until the balance owing is fully paid up. Yes you will pay interest for the R6k so make sure that if you want to pay it over 6 months, you plan to pay around R1050 per month.

The key points for optimally using a credit card are:

• Plan plan and plan it is rather prudent that one plans what item they will purchase using the credit card. Impulse buying is the quickest way to end up in a quicksand place where you use most of your hard-earned cash paying interest.
• Pay more than prescribed minimum amount Do not fall into the trap of continuous spending without a repayment plan. Define the number of months you will need to pay off the balance. If you are not paying off the outstanding balance at one go, divide the amount by certain months and include extra to cover the interest.
• Know what rewards are offered on your credit card by your bank and take full advantage of them.
• Know when to stop When the credit card is close to its limit, it is risky to continue making purchases.
• Earn those rewards for FREE Why not use the credit card to achieve cashbacks, petrol discounts, free airport lounge usage etc. Everybody loves free goodies right?
• Keep a low balance It is by far easier to manage credit card debt that is low. Anything lower than 30% of your limit is manageable.

A credit card can wreak havoc in your life. If you dont want to be the casualty in its path of destruction, you owe it to yourself to learn the discipline of optimally managing it so you can control it. Not the other way round.

Owning and using a credit card optimally requires deliberate intentionality. Do not let it have the upper hand on you.