your guide to credit cards

Introduction

In an ideal world you would never have to borrow money. No one enjoys being indebted to another person or company, but for the majority of people borrowing in some form is necessary, so the important thing is to keep abreast of your finances and always know what you are committing yourself to when you sign on the dotted line.

Forms of borrowing
When you borrow money you make a commitment to paying it back over time. The period over which you will pay off your debt will depend on how much money you borrow and what for, and of course the agreement with your lender.

Short/mid- term borrowing – the main types of borrowing you may choose to use are short and mid-term loans, such as personal loans (also known as short-term loans), credit cards, bank overdrafts, vehicle finance, store cards and in-store finance, which is sometimes referred to as hire-purchase or a credit agreement.

Long- term borrowing – there are fewer types of long-term borrowing, but they include long-term personal loans and mortgages, also known as home loans and bonds. Debt consolidation is another long-term option because this is usually a form of mortgage that is secured on a property.

Other forms of long-term borrowing in other parts of the world include second charge loans or secured loans, which are again loans secured against a property. Also growing in popularity in South Africa are equity release mortgages, designed for older people. Visit the Justmoney.co.za equity release page for more information.

A credit card provides a similar means of borrowing to an overdraft facility, but you can borrow more and at slightly better interest rates. You should consider using a credit card if you want to borrow a small to medium amount of money, no more than a few thousand Rand, and intend to pay it off quite quickly. This may be useful if there are things you need to buy and cannot afford it at the time, but know that you will have the money soon enough. For example you may want to use a credit card to help pay for a large item such as furniture or electrical goods, knowing that you will be able to pay off the credit card debt in three or four months. If you need a credit card you should aim to get one with an interest rate of around 20%, though some charge as high as 30%, whilst others charge lower interest rates of 18%.

Check out the Justmoney.co.za credit card page comparison calculator for more information.

Tip – Avoid store cards as you will pay a high interest rate over a long period of time. Some store cards, hoever, offer six months free of interest. Check interest rates before buying on credit.

Here are some things that you should never use your credit card for:

•  Do not use your credit card to pay where you fall short to your current debt commitments or living expenses. This will just create a circle of debt that you will never get out of – rather speak to a debt counsellor.
•  Never have multiple credit cards – this increases your debt exposure.
•  Do not use your credit card for things that are not in your budget. The interest is not worth it – sometimes it’s as much as 26% so that means for every R1000 spent, you will be charged R260 in interest.
•  Do not use your credit card for gifts or “luxury/splurge” items. Rather make use of your six month interest free retail account if you want to buy somebody a fancy gift.
•  Do not allow for your credit to be automatically increased and do not opt for an increase in credit unless your income has also increased.
•  Never use your credit card like you would a current account – that means don’t put your salary into your credit card every month and think that it will be cheaper to just swipe all the time. There are plenty of bank accounts available that offer good fees and packages which covers electronic transactions, withdrawals and even online banking. Shop around and compare accounts by using the comparison calculator to find the option that is best suited to you.
•  Do not use your credit card to settle your debt or consolidate your debt. There are financial institutions who will offer debt consolidation loans at a discounted interest rate.
•  Do not use a credit card to pay for your studies. You can get a student loan at a much better rate.
•  Do not put it on credit if you could have saved for it. Cash is still king, sometimes.