6 Credit card dos and don’ts

Last updated on 9th December, 2019 at 02:40 pm

According to the SA National Credit Regulator (NCR), we are edging close to R18-billion in credit and store card debt in serious arrears (120+ days). Add to this that 40% of our 27.5-million credit-active consumers have bad debt, and it’s not hard to see why responsible credit card use is so important. And it’s possible if you use these guidelines.

When it’s okay to swipe

“If used correctly, credit cards can be very useful in helping consumers develop a positive credit profile,” says Lauren Wepener, consumer care specialist at credit bureau Compuscan. This will help improve your credit record with credit bureaus, while allowing you the chance to use more credit in the future, adds Nathea Nicolay, head of product at Sanlam Reality. Some examples include:

1. Emergencies

“This is if your card is attached to your emergency fund – for real emergencies only,” says Russell Dickerson, president of the Debt Counsellors Association of South Africa (DCASA). You could find yourself unexpectedly in need of pricey items such as new tyres for your car, or paying the excess on insurance after an accident, says Nicolay.

2. Safer and more convenient travel

“Mastercard has a very comprehensive network of partners, which will allow you to travel without using cash too often,” says Nicolay. This is one of the perks of the Sanlam Money Saver credit card. Some cards give the option of saving up frequent flier rewards and access to slow lounges, adds Wepener.

When you use your Sanlam Money Saver at any of the Reward Partners, you get cash back at no extra cost to you.

3. When you’re earning cash back

Some credit cards, like the Sanlam Money Saver, offer rewards such as cash back every time you swipe. For every 2.5% you save when you spend on your Money Saver credit card, Sanlam will also save 2.5% on your behalf. This means that you will be able to get a 5% cash-back on your total credit card expenditure on a quarterly or annual basis. The Money Saver credit card helps you to save as you spend, thereby reminding you that responsible use of credit will help you grow your wealth. You could also get free travel insurance if you use your credit card to pay for flights, depending on your credit card provider. Remember to be smart about it and pay off the total amount due every month to avoid being charged interest. If you cannot afford the total amount, ensure that you have a repayment plan to avoid being charged interest on accumulated credit.

When it’s not okay to swipe

4. For paying off other debt

“Credit cards often carry a high interest rate, which means that by paying off one debt, it just adds to your credit card debt and can easily get you into a negative debt spiral,” says Wepener.

However, in instances where the credit card interest rate is lower than the debt to be paid off, is it advisable? Yes and no, say the experts. “The basic principle here is to always go for the lower interest rate, but check all the other costs on the account before making your final decision,” says Dickerson. “If the debt is big, the credit card limit might be a problem.”

Wepener suggests two alternative solutions: negotiate with the credit providers for better payment terms, or take out a consolidation loan, but only if the interest rate is more favourable than the debt that it will settle. It’s also important to not be tempted to apply for more credit because the immediate pressure has been relieved by the consolidation loan. Read more about this here.

Besides this, if you’ve already accumulated debt, now is not the time to build on it just because it’s available. “As a rough guide, your total credit use (i.e. all your loans added together) should not be more than 30% of your total available credit,” says Wepener. “If you’re already paying towards debt, be careful that your credit card purchases don’t push you over the 30% guide.”

5. When you’re out to impress

It’s irresponsible when you have no budget, but use your credit card anyway for a night out, warns Dickerson. If you don’t have the cash, and can do without the purchase, don’t haul out your card. “Responsible credit use isn’t taking out credit to shop for luxury foods or to buy perfume – especially if it would be difficult to pay the debt back,” agrees Wepener.

6. If you plan to only repay the bare minimum

“This will enable the credit facilitator to obtain the maximum amount of interest from you and will result in your purchases being more expensive,” cautions Nicolay. Dickerson agrees, suggesting you pay back the maximum amount you can afford on a monthly basis. Read more about how much credit can really cost you here.

The Sanlam Money Saver credit card helps you save money as you swipe, adding up to 5% cash-back to a dedicated savings account, at no cost to you. To find out more, click here.

Do you feel like you don’t have a handle on your debt? Meeting with a financial planner can help you manage your spending choices and build a healthy relationship with money. Click here to set up a meeting.