While credit is a part of most South Africans, it must be managed wisely. It’s important to cut back on credit where you can but having too little credit can also be a problem.
Why you need to be an active credit consumer
If you don’t have any debt, you won’t have a credit score because your credit score is based on your credit habits. It’s unfortunate if there’s not enough data to give you a credit score because this is what lenders look at when you apply for long term credit, such as a home loan, vehicle, or business financing.
They use your credit score to check your credit and payment behaviour and the longer you have been an active credit consumer, the easier it is for them to establish your creditworthiness.
What you should know about credit cards
Credit cards are not that difficult to obtain. A variety of fees are attached to a card such as the initiation fee, monthly fees, and interest rates. Interest rates vary from bank to bank and credit cards can attract high-interest rates.
Be wary of credit card providers who try to entice new customers with their promotional offers. You could get caught out when low-interest rates are only valid for six to twelve months and then revert to the standard rate, which could be high.
Be aware of the pitfalls
Too many consumers forget that banks make money when you use credit. The fees may appear insignificant at first, and a card offers great convenience – before you know it you’re living on credit, without realizing how much it costs you over time.
When it comes to managing a credit card, it’s important to know when it’s appropriate to use it. Using it for a temporary emergency as bridging finance is a good use, as long as you pay it back promptly. Bad debt is often accumulated through impulse buying where you can’t afford the monthly repayments, but you go ahead anyway.
Using one form of credit to pay for another is a trap. You are not paying off debt but just delaying repayment which means you pay more interest in the long run.
Another problem is if you buy food with your credit card on a regular basis as this can easily spiral out of control. Bad debt tends to accumulate if you use your credit card to purchase basic items like groceries, instead of budgeting a cash allowance for the expense.
How to use your credit card wisely
It’s best to repay the full amount owed on your credit card at the end of every month. If you can’t manage this, try to pay back as much as you can – not as little as you can. Don’t just pay the minimum payment or make a late payment. Both incur extra fees which is basically money you’re throwing away.
Don’t max out your credit cards and try and use only 30% of your available credit (also called credit utilization rate) as this will count in your favour.
When you make purchases, there’s a window when you don’t pay interest which can be anything up to 55 days. Pay it before the interest-free cycle ends or organise a debit order with your bank to pay it and save you money.
Some purchases attract interest straight away, such as drawing cash, fuel purchases, and conducting transactions abroad. Either avoid using your credit card in such instances or preload it with your own money to avoid paying the interest.
Check your credit card statements every month and plan how and when you will bring the credit to a zero balance.