Credit Cards – What You Need to Know

credit card usageCredit cards have been around for decades, and it’s rare to meet someone who doesn’t use one – but do you know just how big an impact credit card debt can have on your finances? Whether you have a credit card (or two), or are planning to apply for one, here are some essential facts that you need to know.

Credit cards and the illusion of wealth

Think back to the first credit card you ever had…do you remember how you felt the first time you used it? Many credit card users get a feeling of newfound wealth when they start spending ‘plastic money’ for the first time – and that’s exactly why banks issue credit cards in the first place.

The first important fact about a credit card is that it’s actually a loan. It may have your name on it, but every item you charge to your card is bought with the bank’s money and has to be repaid at some point – often with interest. It’s easy to fall into the trap of spending someone else’s money without a care in the world, but credit card users should resist this urge – and here’s why.

Interest payments that make you poorer over time

Most credit cards in South Africa accrue interest in double-digit figures, ranging between 15% and 20% on average. The interest rate may be lower for higher income earners who use platinum cards or long-time credit card users who pay their instalments reliably, but paying this type of interest on a loan can cost you hundreds or even thousands of Rand per month, depending on your total outstanding balance.

A common mistake that many credit card users make is to only pay the interest due on their cards each month, while others pay a larger instalment and run up more debt until the card is maxed out.

This spending pattern means that the credit card is never paid off, costing many people a fortune in interest payments over time. For example, R500 interest per month over a ten year period comes to R60 000 – this money could have been invested over the same period and doubled in value.

How to manage credit card debt

If you’re paying interest on your credit card each month and just can’t seem to pay it off, it’s time to take some action. Here are some tips for reducing your credit card debt:

  • Stop using your card. Give it to a trusted friend or your spouse for safekeeping to ensure that you don’t run up any more debt.
  • Pay more than the minimum balance. The sooner you repay your outstanding balance, the more you’ll save on interest payments.
  • Keep your card for emergencies. A credit card may be needed for medical treatment or when you travel abroad.

Resisting the urge to spend on credit

If you just can’t help using your credit card, it may be wise to pay it off and cancel it altogether. You could apply for a card in your spouse’s name or keep a savings account for emergency expenses.

Most cheque account cards can also be used for purchases just like a credit card, making it easy to give up the credit habit altogether.

If you’d like further advice on credit cards and credit card debt, contact Northwood today. Our team will guide you through the process of debt reduction.

2 thoughts on “Credit Cards – What You Need to Know

    • Bets, I find the best way is to cut them up, to block further temptation, and then calculate what the minimum monthly outstanding payments are for each Credit Card. Pay what you can afford but at least the minimum payments against each card in order to protect your credit rating.

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