A credit card can play a valuable role in centralising your expenditure, enabling your day-to-day money management, and boosting your credit score – but to benefit optimally from your credit card you need to ensure that you use it to your advantage. With the festive season almost upon us, now’s the time to check your credit card fine print to ensure that you know how to maximise the benefits of your credit facility. Here’s what to consider.
A credit card is essentially pre-approved credit offered to you by your bank which you are then required to pay back over time with interest at a pre-agreed rate. When entering into a credit agreement with your financial institution, it is important that you understand your obligations in terms of interest, as well as other charges and fees that you may be responsible for, such as initiation fees, transaction fees, and ATM withdrawal charges as these factors play a central role in determining how best to use the facility.
Credit card fees generally include interest, which is set by your bank, although keep in mind that the interest payable can differ for in-store, point of sale purchases and ATM withdrawals, so be sure to read the fine print. When first taking out your credit card, your bank may charge you a once-off initiation fee to cover the costs involved in entering into a credit agreement. You may also be required to pay a servicing fee which can be charged monthly, annually or per transaction. As such, it is important to calculate the total cost of your credit rather than looking at just one component of the fee structure in isolation.
To ensure responsible use of your credit card, you should ideally pay back the full amount owing before the end of the grace period so as to avoid paying interest. If you only pay back the minimum amount owing, you will end up paying the maximum interest charges – making this the most expensive way of using your credit card. Most credit card facilities offer a grace period of between 55 and 60 days during which no interest is payable, but managing the timing of your repayments to ensure that they fall within the grace period can be tricky over the festive season.
Remember, most people start their festive season shopping mid-November, and this spending can continue during the course of December and January, which means that the end of your grace period could fall in early January – and you will need to ensure that you have funds available to settle the balance outstanding. January is notoriously a lean month, so it will entail careful planning to ensure that you have at least the minimum amount available to make your credit card repayments. That said, if you continue to make only the minimum payment required, you will effectively end up slipping deeper and deeper into debt.
Also important to understand is the difference between the ‘straight’ and ‘budget’ payment facility as this will also ultimately affect the cost of your debt. When purchasing using your straight facility, these purchases will be included when calculating the repayment owing at the end of the grace period. When purchasing on your budget facility, you can select a period over which to repay the loan, for instance, six months or 12 months, keeping in mind that the interest-free grace period does not apply. Another factor to consider is that the interest-free period does not usually apply cash withdrawals and fund transfers from your credit card.
Remember, late payments towards your credit card can result in your bank reporting you to the credit bureaus, which in turn can affect your credit rating. In addition, you can be hit with additional late payment fees which will only serve to make your debt more expensive. Keep in mind that the manner in which you use your credit card accounts for 35% of your overall credit score, and a bad credit score can severely impact your ability to obtain financing in the future if, for instance, you want to finance a vehicle or take out a home loan.
Having too many credit cards can also affect your credit score, and managing multiple credit facilities can be challenging, so ideally centralise your borrowing through a single credit card facility. Keeping track of the payment cycles of numerous credit cards can not only complicate your life, but result in you spending more and paying more interest if you can’t keep adequate track of your repayments.
To further maximise the benefits of having a credit card, take time to understand how your facility’s rewards and/or loyalty programme works as these can add significant value if used optimally. If your credit card includes a rewards programme, it is likely that you are paying for the facility as part of your annual fees, so it makes financial sense to use the benefits. Loyalty programme benefits can include cashback rewards and vouchers, travel insurance, fuel vouchers, airport lounge access, free magazines, discounted Uber rides, and AA roadside assistance, although it is important to ensure that you know how to access and utilise these benefits to ensure that you get the maximum benefit from them.
A significant benefit of having a credit card is that it can be used internationally, providing travellers with a cashless option when making international transactions. However, before swiping your card abroad, make sure that you understand what international transaction fees apply so that you’re not faced with nasty surprises on your return.
Other advice for optimal, responsible use of your credit card over this festive season includes:
- Avoid using your credit card to fund your holiday consumption. Using your credit card to improve your standard of living, even for a short period of time, is not ideal.
- Create a festive season budget and do your research online when it comes to pricing and price comparisons.
- Do not use your credit card to pay off debt. If your debt is out of control, rather take a step back and seek professional financial advice.
- Beware of using your credit card at internet cafés and unsecured terminals as this can expose you unnecessarily to fraud.
- Use only secure websites when doing online shopping. If you’re unsure of a website’s security or authenticity, do your research before proceeding with the purchase.
- Review your credit card statements regularly, and plan in advance to ensure that your January repayments happen timeously, especially if you’re planning to take leave.
- Do not let your credit card out of your sight when making a payment or withdrawal.
- Make use of your bank’s SMS notification system as additional protection against fraudulent activity.
- Do not disclose your credit card details, password or PIN number via telephone, Whatsapp or email.
If used correctly, your credit card can be an effective transaction tool that allows you to use pre-approved credit to make interest-free purchases while at the same time building a good credit rating.