Credit card: Friend or foe?

Adriaan Kruger
2014-05-15 13:27
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Port Elizabeth - More versatile than a fancy smartphone, the credit card can be seen as the best invention ever... or is it the worst?

Let's evaluate...

It gives you the freedom of an account at every retail store, cash advances whenever you need it, long term credit with payments over as many as 24 months and the ability to check into a hotel, rent a car or buy an airplane ticket on the internet.

It can be used everywhere in the world. Your credit card will automatically give you pounds in London and dollars in New York thanks to MasterCard and Visa. It can even double as a very good savings account. And it fits into your pocket.

It is the best invention ever - if you use it carefully and responsibly.

However, this friendly piece of plastic can quickly turn into a vicious monster that will eat you alive if you are irresponsible.

The ease of use and the easy credit comes at a price in the form of high interest rates, much higher than most other forms of credit.

You get into trouble much quicker with a credit card if you overspend or forget to make a payment or have a problem with making a payment. And the very next month you need to pay double the amount and more in interest.

You are in deep trouble if you skip two or three months.

“Keeping up with payments on your credit cards, along with other debt, may be a big challenge. But it’s one you really need to master,” cautioned Arnold Dippenaar, head of Standard Bank’s Consumer Credit Card division.

But for many South Africans this mastery stays an illusion... and the stats are alarming!

Prof. Bernadene de Clercq of Unisa’s Bureau of Market Research said on Wednesday at the release of the latest MBD Consumer Financial Vulnerability Index (CFVI) that consumers’ ability to service their debts is at the lowest level yet.

One reason is the ever increasing cost of living, but another is paying for your day-to-day expenses by credit card.

TransUnion CEO Geoff Miller said at the release of the credit bureau's latest consumer credit index last Tuesday that there is a rising use of credit cards to pay for day-to-day household purchases.

And the preliminary results of Fin24's Debt Issue survey shows that  an overwhelming 60% of respondents list credit cards above other debt like personal loans, retail store accounts, home- and vehicle finance and an overdraft.

Even more alarming is that more than a third of respondents say they spend 80% of their income servicing debt, with 20% saying they use debt to pay off debt.
Dippenaar especially warned against using credit cards to pay off debt, but more importantly to avoid unnecessary credit card purchases during the typically high spending months.

Listing December, January and around Easter as problematic times, he said many consumers pay for luxuries such as holidays and durable goods with credit cards, which places a huge burden on their ability to service debt.

"It is also around these times that (consumers) fall behind on their bills and default on their credit card repayments," said Dippenaar.

Another problem is that many people simply forget to make credit card payments on time, which has serious consequences in terms of interest charges.

Sometimes a missed payment can be a genuine oversight, or there may be restricted internet access preventing people from logging onto the internet and managing their finances. A missed or late payment not only adds more financial pressure, but can also affect as person’s credit record.

Managing your loan repayments and planning ahead for luxuries like holidays can go a long way to reduce the problems, he said.

Check out these 5 steps to pay off your credit card.

* How do you see your credit card?
Tell us.

- Fin24

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