One of the most common mistakes people make with their money is using financial products they don’t understand. Like a credit card.
While the concept of a credit card is simple – the bank approves you for a certain amount of credit, you spend it and then pay it off each month – you need to understand how a credit card works to manage it properly and keep it working. during you, not against you.
Sbusiso Kumalo, chief marketing officer at African Bank, said consumers new to credit cards should start with the basics to understand the different types of credit cards available and how they work.
âThe main point to remember is that credit is not free. A credit card has fees, like interest, service and initiation fees, and must be paid off each month.
âIf you know what you’re getting into, you can manage your credit responsibly and improve your credit score as well,â he said.
Kumalo elaborated on monthly repayments on a credit card.
âYou have the option of paying a minimum amount or paying the balance in full at the end of the month. Paying the minimum is quite acceptable, but it is ultimately the most expensive option because it will cost you the most in interest.
âOn the other hand, when you pay off the entire balance, you can get up to 62 days interest-free on your purchases. This then makes using your credit card an advantageous payment option.
âYou have to pay at least the minimum on the due date. Any late payment will result in payment arrears on your account, which could result in your account being blocked and access restricted.
You apply for a credit card just as you would a loan or any other type of credit at the bank. The bank will do a check on your credit history and affordability and if your card is approved, they will authorize a credit limit (the maximum amount available on the card).
The credit limit is determined by factors such as your income, debt, payment history, and the available credit you have on other cards.
The three golden rules of a Kumalo credit card are:
1. Pay your balance on time every month,
2. Use it for unwanted needs, and
3. Avoid âcredit creepâ.
1. Pay your balance on time: If you don’t make your payments on time, the bank will report it to the credit bureaus. Payment history is 35% of your credit score (a three-digit number that indicates how risky it would be to lend you money). To avoid additional charges and damage to your credit score, you must pay at least the minimum owed each month.
2. Use it for needs, not for wants: don’t take a ride to fund irresponsible spending and use your credit card to pay off debt. Instead, reassess your financial situation and seek advice from a financial advisor.
3. Avoid âcredit creepâ: It’s not just big purchases that can suddenly burden you with a large credit card balance.
Using a credit card can give the impression that the purchases never happened. Therefore, it helps to treat your credit card like buying cash when deciding what to and shouldn’t swipe your card. Small impulsive follies gradually increase your balance, hence the expression “credit creep”.
âOur advice is to always understand the basics – what credit cards are available and how you can use each one. Never spend more than you can afford. Avoid treating a credit card as your money. and always remember that it is borrowed money that has to be paid back by you, âKumalo concluded.
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