Credit cards are promoted as must-haves - they’re easier to carry than cash, offer greater security than cash, and can be used to strengthen your credit score if used wisely - hugely important if you ever want to apply for vehicle finance or a home loan. But they also come with their own pitfalls and need to be used with caution if you don’t want to get yourself into hot water.
In the next few paragraphs, you'll learn everything you need to know about getting a credit card: how to decide whether you should get a credit card and how to use it so that it’s a benefit and not a burden. Lastly, you'll find a few points to help you choose a credit card if you decide to get one.
If this is your first foray into the world of credit cards, you may think they’re much like debit cards. Debit and credit cards do work in fairly similar ways; they both have the logo of a major credit card company (Visa or MasterCard), they can be swiped for payments (instead of cash) and usually require a pin for successful transactions. But there’s one very big difference: debit card payments come off a current account while credit card payments are made using credit which you have to repay with interest later.
‘Credit limit’ refers to the total amount of money that you can spend on your credit card. Your credit limit is determined by several factors including your credit score and income. People who earn more and have higher credit scores are often given higher credit limits.
Once you’ve had a credit card for a while, the issuing lender or bank might offer to raise your credit limit, but think twice before accepting it. It’s safer to keep your credit limit to an amount that you can pay off easily, and a higher credit limit might tempt you to over-reach.
A ‘minimum payment’ refers to the smallest amount due every month on your card based on a percentage (usually 3% to 5%) of the capital. The minimum payment tends to include interest for the month, potential charges for a defaulted payment and if there is an annual fee, part of it might also be included.
The minimum payment terms change from bank to bank so be sure to familiarise yourself with the specific terms of the credit card you’re interested in. Because minimum payment is based on a percentage, the smaller your debt, the less you are required to pay.
Credit card issuers charge interest only if you carry a balance over from one month to the next. If you pay your balance in full every month, your interest rate is irrelevant, because you don’t get charged interest at all. Obviously, it’s important to know the exact payment due date so that you can pay your balance in full and avoid accruing any interest (the sensible thing to do).
If you don’t pay off your credit card in full every month, you will be charged interest on the balance. Usually the annual percentage rate is between 15 and 20 percent, but credit card interest is actually calculated on a daily basis and then compounded every month. What that means is that you will be charged interest on interest if you allow it to roll over from month to the next. Again, you should always aim to pay off your credit card in full every month.
There are a number of ways to establish a credit score, but by far one of the most popular options is to get a credit card. However, a credit card itself will not help you build a good credit score; your spending and repayment habits will. If you spend responsibly on your credit card (spending no more than your 75% of limit) and repay in full every month, you’ll likely see a positive trend in your credit score.
However, if you max out your card every month and make only minimum repayments, you could damage your credit score. A downward turn in your credit score would be even more likely if you did this with multiple credit cards, a sure sign of irresponsible financial habits.
Credit cards tend to come with a plethora of potential fees. We’ve already looked at interest fees, but here are some others commonly associated with credit cards.
Initiation fee—Many, but not all credit cards involve an initial once-off fee when the account is opened
Monthly account fee—This is a recurring fee that you need to pay in order to use your credit card every month.
Credit facility fee—Some banks add this to the monthly account fee, saying that it covers the administration and management of the credit facility specifically.
Reward programme fees—Lenders will sell you on the incredible rewards offered by their credit cards, but often you actually pay for this facility, usually in the form of a yearly fee.
International transaction fees—Credit cards can be used overseas and offer an easy cashless option for travel. However, international transaction fees will apply, and these can be quite hefty. Ensure you know what these fees are.
There can also be additional fees for late payments, withdrawing cash, balance transfers and going over the credit limit—it’s a good idea to find out exactly what these are for your specific card.
If you meet the minimum salary requirements, you might be given the choice between a premium or standard credit card. They technically work in exactly the same way, but premium cards come with certain perks, such as better rewards or 24/7 customer care. Don’t be fooled though, because these come at the cost of higher monthly fees. Weigh up if the benefits are worth the extra fees and choose the best option for you, your needs and your financial position.
In recent years, banks have started incorporating the EMV (Europay MasterCard and Visa) computer chip in their cards. Cards with these chips are meant to protect consumers better from fraud. The information stored in the chip includes data that doesn’t change—such as your card number, CVV and expiry date as well as extra information that generates dynamic, once-off data during a purchase. Because of this dynamic data, it makes it hard for anyone but you to use the card and acts against counterfeit cards as the dynamic data is only valid for a single transaction
If you can reign in the urge to spend more than you can afford (remember, credit is not money in the bank) and make your repayments on time, a credit card can help you build a healthy credit score. But do your homework: look carefully at the fees, terms and conditions, grace periods and interest rates, and take on a credit card for the right reasons - for emergencies and to build a credit score. If you are already in the red or you doubt your ability to make repayments in full, credit cards are best left alone.
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