IN CONTINUING WITH our advice on budgeting and wealth creation, the Consumer Affairs Commission (CAC) recognises that proper debt management (reducing monies owed, along with associated interest and other charges) plays a key role in reducing ones expenses and increasing the amount of money available for saving and investment.
There are however certain key pointers one must consider when making an application for a credit card or even for everyday usage, to ensure that you don't plunge yourself into a financial crisis. Three key points you must know about credit cards are:
1. They are loans
2. Interest and penalties apply
3. They must be properly managed
Lesson 1: It is a Loan!
Your credit card represents your access to a loan! So for purposes of understanding how it works and understanding how it should be used let us call it your "Loan Card". As with any other loan it is borrowing money for your use that does not belong to you. Therefore you will have to pay it back. Depending on how well you manage this form of loan there may be no interest. But if you do not manage this loan well then the interest alone could be severe!
Owning and using a credit card is serious business, not a plaything and definitely not a fashion and glamour profiling thing!
Lesson 2: There are associated costs!
Depending on your credit card issuer there are several costs that are associated with having a credit card regardless of whether you have used the card to purchase goods or services or not! These include membership fees that may be paid annually or monthly. Outside of that there are also service charges linked to cash advance options or extended credit limit allowances. As a standard there are late payment charges or fees and then there are the interest charges. You must find out the value of all of these and any other costs that apply to the card you have or the card you are interested in getting before you sign the application form!
Lesson 3: Analysing the
Costs and Benefits
Many Credit Card issuers offer "benefits" for volume usage. That is the more you use the card the more likely you are to qualify for certain "benefits", (example air travel tickets or free vacation). As a rule of thumb however, the value of these "benefits" is on average usually about one per cent of the costs. This means to qualify for a benefit worth $1,000.00, you could have spent close to $100,000.
Lesson 4: Managing Your Credit
It is a useful guide to keep your total monthly transaction value within a maximum threshold of 25 per cent of your regular net monthly income. If you do this in any given month you should be able to pay your entire bill, plus interest without using another credit card, borrowing money from a friend or putting undue fiscal strain on yourself. It is even possible to set this as your own credit limit.
