What are credit cards?
A credit card is an unsecured loan that allows the cardholder to make purchases based on an agreement to pay the
issuer back. This is basically a card giving the account holder an option to borrow funds. Credit cards charge
interest and are usually used for short-term financing. These cards can be lifesavers or in some cases the very
thing that brings you into debt. Credit cards can either allow the cardholder to make purchases and payments on a
line of credit or the option to make cash withdrawals at ATMs or banks.
2 types of credit cards
Business credit cards
Business credit cards are designed with unique benefits for business users. These cards are intended for business
use and make business expenses easier to track and keep a record of.
Benefits
- Banks reward businesses with incentives, points and cash if the credit is well maintained. These rewards
have more value than the rewards that come with a traditional credit card.
- Business credit cards serve as the ultimate convenience tool for business owners. This is away to build your
business even if the necessary funds are not available yet.
Secured credit cards
If you have little or no credit history, this is the option to consider. A secured credit card is backed on a
savings account used as protection/collateral for the funds used on credit. Just like any other credit card, there
is a limit. However, a secured credit card's limit is based on the amount deposited into the backing savings
account and/or the account holder's credit history.
Benefits
- These cards provide an opportunity to rebuild a poor credit record. The purpose of secured credit cards is
to establish the user's' credit score up to a point where an unsecured credit card can be obtained once again.
- Secured credit cards also simplify overseas shipping.
Why credit cards?
Let us not hide away from the fact that credit cards are not cheap and are at high risk for creatingdebt. Bank
charges and interest on the credit is a big disadvantage. Yet, so many people have anduse credit cards daily. Why
is that?
- Convenience
- Renting a vehicle
- Rewards
- Emergency costs
The Pros
+ Convenience
If you need to buy something expensive or cover an emergency that you can't afford to pay for all at once, a
credit card is ideal. Credit cards let you buy now and pay later. Let's say you had to pay for a major car repair,
by using your credit card you can keep your checking account intact and pay the balance over time, thus not
throwing you into a sticky financial condition for the restof the month.
+ Building a positive credit
If you have no credit or if you're trying to improve your credit score, using a credit card responsibly will help
your credit score - as long as you stay within your means and pay your billson time. Credit cards are
indispensable tools for persons wanting to build good credit. By makingfrequent purchases and keeping current with
your payments, you can quickly build a respectable credit history. You'll be able to get a loan at a fair interest
rate and be approved for various other ventures. By using credit cards wisely, you can boost your score in just a
few months.
+ Peace of mind when travelling
Some credit cards offer benefits such as travel and emergency assistance or other travel-related features. Think
of purchasing power. When you want to rent a car or stay in a hotel room, you'll almost certainly have an easier
time if you have a credit card. Many credit cards (especially Visa and MasterCard) are accepted virtually
anywhere.
+ Rewards
By using a credit card, you can earn money back on your day-to-day purchases. Certain credit cards give
cardholders cash-back on things like groceries, gas and select store purchases. If you like to travel, many cards
offer discounts on flights, hotels and car rentals as rewards. Of course, you don't want to spend excessively just
to earn a few reward miles, but why not make a couple of bucks on purchases you'd make in any case?
The Cons
- Beware the debt trap
Remember that a credit card is a form of borrowing. You buy now and pay later, it's a privilege, thus, there are
risks involved. If you don't pay off your balance in full within the timeframe, you'll rack up interest at a high
rate. A high APR rate can drag you deeper and deeper into debt if you don't pay off your balance quickly, or if
you only barely make your minimum repayments.
- Other costs
The interest rate is not the only cost of a credit card. A fee will be charged if you're late at making your
monthly payment, or miss it altogether. You'll also pay a penalty if you exceed yourcredit limit. This can add up
quickly, especially for repeat delinquents.
- Easy spending
Credit cards make it easy to spend money, perhaps too easy. It's easy to become disconnected from your spending.
Sometimes swiping that little piece of plastic doesn't seem like a big deal. Every married South African man will
know the perils involved in handing over that credit card to ma'am when she's going to the mall. It all comes down
to being careful with your money. Luckily, if you've read this far, you're well on your way to becoming a
responsible credit card user!
- Destroy credit scores
If abused, your credit card spending habits can drive your credit score into a downward spiral. Your credit score
will take a hit if you miss payments, carry a high balance or have too many open credit card accounts.
Tips for effective credit card use
Pay your bill on time every month
Avoid paying interest on your purchases by paying the agreed amount each month in full. Missing a payment is not
an option. If you are afraid you might forget, set a reminder on your phone. Skipping payments can result in late
payment fees and an increase in interest.
Check your credit card balance online once a week
This can help you stay on top of spending. Do not be caught by surprise by a nasty bill at the endof the month. If
you see that you are spending more than you can afford to pay back at the end ofthe month, stop using the card
immediately until the owing amount is paid off.
Use the card for needs, not wants
You need to be strict with your purchases. Having a credit card is a big responsibility. Consider only using your
card only for the necessities.
You have an overdraft to your disposal, but isit perhaps a better option to use a credit card?
What is an overdraft?
An overdraft facility is usually connected to a cheque account. You can only use the amount of money that is
within your cheque account. However, an overdraft is an option to use money that isn't in your bank account yet.
There is a limit to an overdraft facility. There are monthly fees to an overdraft facility. There is a type of
penalty fee payable on your account if you make use of anoverdraft without applying for one at your bank.
The difference between a credit card and an overdraft?
In essence, both products are a type of credit agreement. They both have limits and are due for repayment on a
specific date.
An overdraft facility is handy cushioning for unexpected expenses and debit orders if you want to manage cash
flow. But an overdraft can be overkill. If you think about it – an overdraft is basically a credit card without a
credit card. In fact, the card connected to the cheque account is your debit card. By making use of an overdraft,
you make purchases through a debit card. You are using your current account (which should have cash on hand) to
make more debt. This debt will have a service fee connected to it and an interest rate if this account should be
in arrears for too long.
If it is more credit you want, why don't you increase the limit on your credit cards?
Why would I still want to use my overdraft facility if the cost is such expensive banking fees? Sometimes it might
be because you only have the option to get an overdraft and not a limit increase on your credit card. There are
obviously other favourable situations for an overdraft. But
they are usually significantly less than credit cards and come at the same interest rate without giving you
advantages like cash-backs. Some credit cards even have the luxury of being interest-free for an initial period.
So what's the conclusion on overdraft versus a credit card?
It is a no brainer – already having a credit card must eliminate your need for extra credit on demand (credit on
demand does not refer to loans). You really need to start asking some probing questions about your lifestyle if
you require a facility that enables you to spend amounts exceeding your bank balance.
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