All about that little piece of plastic in your wallet
To the majority of people a credit card is a dangerous tool which allows them to immediately satisfy their wants at a very high cost of interest.
There are people who are reckless and uneducated about the use of debt to finance their lives and the damage which it can cause and there unfortunately are also people who don’t always earn enough money consistently in order to support their family and they rely on some line of credit to help fund their family’s basic living needs.
For someone like me who is lucky enough to have the opportunity to earn a decent and regular stream of income a credit card can be a very useful tool.
Some benefits of these cards include:
Visa and MasterCard based credit cards are accepted in many countries all over the world, this makes transactions while traveling a much simpler process.
In the event of an emergency you can also withdraw cash from an ATM anywhere in the world where the ATM has a Visa or Mastercard sign.
An easy way to get out of an emergency
If you have an emergency fund in your bond or in a money market fund then this money is not always immediately available in the event of an emergency. A credit card can help you pay for this emergency while you are waiting for your funds to leave your emergency fund. You can then pay off your credit card using these funds once they have cleared.
Please note it is very important that you have an emergency fund in place which exceeds your available credit limit before thinking of holding a card for these purposes.
Build your credit score
In my early 20’s I wanted to buy a flat but I didn’t have enough credit history to qualify for a bond, so I decided to get a credit card to help me build a stronger credit record. I transacted on this card throughout the month and paid off the card in full at the end of every month without paying one interest instalment. After one year of doing this as well as doing the same on a Woolworths store card I developed a proper credit profile and my bond was eventually successfully approved.
In a market of intense competition credit cards are no longer a simple one trick pony. Credit card providers are trying to find ways to attract consumers by giving them unique offerings which will entice them to transact on their cards. This means there are many factors which we need to work through before we decide on which card we keep in our wallet.
So let’s look at some of the factors which we need to watch out for when making this decision:
Credit cards can come with some costly fees. For example, I pay a monthly credit card account fee of R43.38 and a monthly credit facility service fee of R16.14 (R59.52 in total per month) for my Discovery Gold credit card. This is double the R30 I pay in total bank charges per month.
You are not charged for purchases on your credit card but there are other charges such as ATM withdrawal/deposit fees and declined transaction fees but this not be an expense you will incur frequently.
Also watch out for initiation fees on credit cards. Some cards have initiation fees which can be as high as R200 when starting an account. My credit cost has an initiation fee of R166.45 as of 2018 (this was a bit lower when I got the card a few years ago) and this fee generally comes off of your credit card as you open the account.
There are many credit cards in the market. Some come with very unique offerings in an effort to differentiate themselves from their competitors. For example my discovery credit card comes with 48 hour pre-booking access to all Big Concert events – which I used to buy Sam Smith tickets for my girlfriend this week.
It is important to look at what the credit cards offers and if these offerings are of any value to you. Most of the time people do not make use of these added bonuses and would be better off just going for the credit card with the lowest monthly fees.
The interest rate which you will receive on your credit card will be based on a credit check and affordability calculation done on yourself and this is generally in the range of 15% to 22% per annum.
Most cards now offer interest free days where you will not pay interest on a purchase for a specified number of days. This will depend on your credit card statement cycle (generally starting at the first of each month but may differ based on when you started your account). This is generally up to 55 interest free days but may vary for each provider. This means if you make a purchase on your card on day 1 of your billing cycle you will receive 55 interest free days on this purchase, but if you make a purchase on day 25 of your billing cycle you will only receive 30 interest free days.
I want to talk from experience when it comes to reward programmes and since I have a Discovery credit card I have experience with their Discovery Miles reward programme. This is a reward programme offered by discovery which is connected to their credit card offering.
For every R15 you spend you get one Discovery mile and you can multiply the miles you earn when you transact at selected partners (such as Clicks, Pick n’ Pay or Dis-Chem and others which can be seen in the source link below), but in order to multiply your miles you need join Discovery’s Vitality programme at a cost of R239 per month and your points will be multiplied based on your vitality status (based on the points that you achieve per year).
Discovery miles costs R435.79 per year this is billed monthly off your credit card (R36.32 per month) and your miles can be spent through a discovery online shopping portal linked to various online partner retailers such as Takealot, Zando or Sportmans Warehouseor you can use you miles to purchase flights through Kulula or South African Airways. See the full list of partners where your Discovery Miles can be spent here.
This is a snapshot from Takealot and as you can see 10 Miles is worth R1 (R2189 selling price for the watch or 21890 Discovery Miles).
This means you will need to spend R328250 with your credit card without any multiplying miles transactions in order have enough Miles to buy this Garmin watch (R15 per Mile multiplied by 21890). This may take quite a lot of time to achieve and if you do work the system and join the Vitality programme the monthly fee of R239 is a rather large commitment.
About 3 years ago I had Discovery Vitality as well as Discovery Miles linked to my credit card and the fees of these two programmes outweighed all benefits I gained from them. I tried to get all the benefit I could out of these programmes and to multiply my points when spending at specific partners but in the end I never came close to making a significant purchase with Discovery Miles. I subsequently unsubscribed from the Vitality as well as Miles programmes.
Reward programmes in the end are designed for businesses to gain more data about their customers as well as sign you up to the wider offering of products they offer so they can inevitably make money off of you.
Although you can work the system for example if I was a virgin active member being on Discovery’s Vitality programme would only benefit me and if I was diligent in transacting all my monthly expenses on my credit card and thinking through where I make certain transaction so that I multiplied as many Miles as possible the Discovery Miles programme may benefit me. Generally I think you are better off just selecting a simple no frills credit card which has very low monthly fees. Didn’t I mention one earlier which had a R0 fee?