By “store cards” I mean the type that allow you to buy on credit. They are certainly convenient as they allow you to buy things without needing actual money, and many stores offer interest-free credit for a few months and include great benefits such as:
- insurance cover for in case you lose your job
- monthly deals / vouchers
- magazine and exclusive access to a website
It all sounds great and it seems almost silly not to take them up on the offer. Some people even feel that paying for something interest-free over a few months makes far more financial sense as it allows you to earn interest on your money in the bank. That does make sense; but only if you are really disciplined about your purchases and you actually do the admin to ensure that you allocate the money in your bank account. It’s a small saving considering the admin and time involved.
So why are store cards bad?
1: Too easy to spend
It is far too easy to spend money on your card and unless you are incredibly self-disciplined you can very quickly spend more than what your budget allows for. That is great news for the store but terrible for you as you still have to pay it back! Many stores will also send personalized promotions and vouchers to ensure that you keep buying more.
2: Budgeting becomes hard
If your clothing budget is R1,000 and you spend it on a store card which offers 6 months interest-free payments you will essentially pay R166.67 each month for 6 months.
- It becomes tempting to spend more money the following month as your budget is 1,000 but you only physically spent R166.67 (your first payment). You can easily get confused.
- If you over-spend on your store card, it doesn’t help under-spending on another category of your budget (e.g. Groceries) as this will not balance your monthly spending. Your store card spending affects the next 6 months worth of budget and it is very hard to keep track.
- If you are feeling cash-strapped and you decide to purchase no clothing on your card, you will still need to pay for previous months shopping. It will take a while before the outstanding amount is all paid off.
It is very hard to manage a budget when previous months shopping affects the current months payment. In fact, many people give up on budgeting as it’s just too confusing.
3. You get stuck in cycle of debt
If your monthly repayment on your card is quite high, you will probably not have any money left to buy the things you need (or want). So, instead of saving up for the items, we generally just purchase more on the card which makes our monthly payment higher and causes us to have less money each month and inevitably forces us to spend more on the card. It’s a never-ending cycle; until you end it!
If you are tired of being trapped by debt then cancel your cards. Follow the 5 steps below.
Cancel your store cards
Step 1: Choose one store-card
It’s hard to make too much change at once, and you may not have the money now to do drastic things. So choose the card with the least amount of debt.
Step 2: Convert to cash
Do not make any more purchases on your card. Take a photo of the card for reference purposes and then throw the card away. (Or if that sounds drastic, hide it in a safe place). From now on only spend cash instead of the card.
Step 3: Pay a little more each month
When you recieve your statement each month, round the payment figure up and pay a little more. If you payment is automatically debited from your bank, then find out if you can pay cash in the store and make just a small additional payment.
Step 4: Close the account
As soon as you have paid the card off; close the account! Stop the cycle of debt!
Step 5: Repeat with next card
Just slowly pay off all your cards and feel the burden of debt lifting. You really can pay off all your store debt by making a slow and concerted effort. It may take a few months (or even years), but it is 100% worth it!
And how does this affect your Credit Score? Read all about credit reports and credit scores here.