Credit cards are a pre-approved way for you to access money from your bank. When you use your credit card, you can spend up to your maximum credit limit, then you repay the money over time. Usually the terms of credit will be that you need to make a minimum repayment each month, and you will be charged interest on the remaining balance. If you pay the full amount owed by the due date each month, you will not be charged interest.
A credit card allows you to pay for purchases at your leisure. You can use it to grab that bargain when you see it without having to enter into a hire purchase or layby agreement, and because the card is pre-approved you know exactly how much you can spend. On holidays, a credit card means you don’t have to carry a lot of cash or travellers cheques, and you can load the card up with money before you leave, so you’re spending your own money rather than borrowing it. If you overspend your budget – and we all do sometimes - you can use your card and pay it off at your convenience later.
While a credit card lets you buy without having to save first, that is exactly where it can become a problem! If you have trouble saving in the first place, you may have trouble making regular repayments to a credit card. You should have a serious conversation about what repayments you can afford, and what your credit limit should be, before taking on any credit facility. Missing repayments can affect your credit rating, which means problems for future borrowing. Your banker will be able to guide you in this – the bank doesn’t want you to get into financial trouble any more than you do! Online sites like Sorted.org can also help your decision making.
Watch that interest
The interest and fees on a credit card varies on the type of card. Every bank will have a variety of cards on offer. Low interest cards with higher fees may suit you if you are unable to pay the full amount each month. Higher interest cards, which have lower fees, are fine if you can pay them off in full by the due date. Reward schemes are attached to many cards nowadays; talk to your banker to decide which is best for you.
- Base your credit limit on what you can afford to repay. If your card is maxed out, can you afford the monthly repayments?
- Don’t use your credit card for cash withdrawals. You pay interest on cash withdrawals from the day they are made.
- Watch that your credit limit is not increased or your card upgraded without your approval. Higher credit limits can potentially mean higher repayments!
- Your credit card should be an aid to smoother management of your finances. Talk to your bank about how to make it work for you; they are there to help.
Nicky Taylor is a Christchurch-based writer and illustrator. As a long-term consumer of banking services, she is aware of the issues and concerns people may have around financial management.