Credit Cards – the pros and cons

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Credit cards are really useful and convenient now days, but it’s so easy to fall into debt and your finances can quickly spiral out of control. There are however both pros and cons to using credit cards and we’ll explore these in this post.

Listen to me chat about this on Cape Talk Radio.

In short, if you’re really good at managing your money and controlling your expenses then a credit card could be a good thing. However, if you have little self-control then rather don’t even consider a credit card.

Before looking at the pros and cons of credit cards, let’s first look at the costs involved if you buy things on credit.

Costs

Everything costs money, so a good start to investigating credit cards is looking at all the fees applicable. Most banks and financial institutions will charge a myriad of charges including an annual card fee (sometimes a monthly fee), a lost card fee, monthly membership fee, service fees and possibly even loyalty program fees.

All these costs are not always obvious upfront and will require some reading up. However, using my own card as an example, here are the fees I pay on my Discovery Credit Card.

  • Annual Discovery Miles (loyalty program) fee R435.79
  • Monthly service fee R43.38
  • Monthly credit fee R16.14
  • Replacement fee for lost card R166.45

Thus, on a month to month basis I pay R95.86 for the privilege of using my credit card. Obviously other banks have their own charges so why not have a look right now at what you are paying. And if you have multiple credit cards then you are paying multiple fees. Calculating the annual costs involved in having a credit card can be quite a shocking calculation! So based purely on the fees, is it worth keeping your card(s)?

Other fees to take into account are cash withdrawals, transfers, fuel transactions etc and these fees may or may not be applicable to you depending on how you use your card.

Cost of credit

In addition to the monthly costs are also interest charges on your purchases. This depends a lot on how you manage your account as you can get away with paying no interest at all as we will see later on in the post.

The way your account works and how interest is applied is rather complex and I sometimes think that companies purposefully hide the true details. I spent over 10 minutes now looking to see what the interest rate is for when I owe money on my credit card and I eventually found it on my statement. The website and marketing material obviously shows all the benefits and good things but you need to search a bit to find the interest rate details.

The interest is 24.3% which is really high! In fact it’s probably the highest interest rate you will find when it comes to borrowing money. And all credit card companies offer similar non-negotiable rates.

So if you purchase something for R1,000 but pay it off over 6 months you will end up paying R1,127.82 (give or take). This is not an exact calculation as it does not take the interest-free period into account nor the monthly fees. But let’s say it’s approximately R127.82 in interest that you are paying. It may not sound like a lot but imagine your spend R12,000 but end up paying it off over 8 months. In that case you would pay R2,087.50 in interest! That is a lot of money especially when you consider that most credit card users have no idea what they are spending month to month and the interest portion just grows and grows! Have a look at calculating the Future Value of an investment as the Excel Formula FV can also show the interest you will pay on your debt. Interest is the same thing whether it’s interest you are earning or paying – the value is the same.

Why using a credit card is a bad idea

It’s obvious from the sections above on fees and interest that credit cards are expensive! Generally speaking a debit card is much cheaper and many bank accounts offer a linked debit card which doubles-up as an ATM withdrawal card with minimal fees. The advantage of this is that you can not spend more than what you have in your account and thus no interest will be charged and you cannot get yourself into debt.

If you struggle with self-control when it comes to shopping then credit cards are very dangerous! Spending money is just too easy and this counts for any store cards too that allow you to spend now and pay later. If you can’t control your spending then rather cancel your cards and don’t ever be tempted with a credit card as it is just bad news!

If you don’t specifically need the credit you are being offered on a credit card, rather don’t have one! And really question yourself why you would want more than one credit card!

When using a credit card could be a good thing

There are instances where it does make sense to use a credit card and I’ll share my own circumstances to help you understand.

Give your credit card a break

Firstly, it’s convenient! It’s no more convenient than a debit card in that you can use both types of cards anywhere. The difference obviously is that you can use money that you don’t necessarily have. What I mean is that if you have no money in your bank account you can still buy things with your credit card (although you’ll be in debt).

However, if you have money in your bank account and use your credit card then you can earn interest in your bank account during the interest-free period on your credit card. Usually you have 55-days interest free on your card but there are some complicated rules so I do my calculations on 30 days. Thus, if I spend money on my credit card but actually have the cash in my account, I calculate the interest I earn in my bank account for a 1 month period. It’s not exact, but it explains a concept.

If I spend R1,000 on my card in a month whilst I actually have the cash in my bank, I will earn R4.04 interest in my bank account (my Capitec account earns 4.85% interest), and if I save money in my home loan account at an interest rate of 10.25% I will earn R8.54.

Neither of those amounts are worth writing home about. However, if I spend R5,000 on my card and have the cash in my bank account I would earn R20.21 in my Capitec account or R42.71 in my home loan account. And if I spend R12,000 on my credit card and have the cash in my account I would earn R48.50 in my Capitec account or R102.50 in my home loan account.

Thus, if I spend R12,000 or more on my credit card in a month when I actually have the cash in my account, I can earn a little more in interest than what my credit card fees are and get the convenience of using my card. This only works if:

  • you reach a spending threshold per month
  • you actually have the money in a high earning  account (or investment)
  • you pay the full amount off on your credit card at the end of each billing cycle
  • you use an app to manage your money (see what app I use on my cool tools page)

Then in my case I also receive reward points and cash back on card spending which actually equates to R300 – R400 per month. This is because I only have 1 credit card and I only belong to one loyalty programme and I use my card for everything!

I feel that you should only ever join one loyalty programme and do everything you can to max out your rewards. Each programme has a membership card, an app, rules and admin. I enjoy saving money but I don’t enjoy having to carry around a wallet full of cards and to check all my apps for specials and to go through all the admin of using my points at the right time to earn something-or-other. Do one loyalty programme and do it well!

Conclusion

If you have good self-control and manage your money with a monthly budget it can be useful and convenient to use a credit card. You should however try get into the cycle of only spending money that you actually have. You can see why cashflow matters and having the money in your bank account means that you can earn interest on it while you spend on your credit card. You must be disciplined though.

A credit card is also very useful for emergencies as you never know when you may need money right away. Again your should have money saved in your emergency fund, but you can always use your credit card for the immediate transaction and move money between accounts at a later date.

It’s easy to work out for yourself what is better as the calculations really don’t need to be over complicated. Work out what’s best for you and then stick to it! 

11 comments

  1. Just as you detailed there are definitely pro’s and con’s and everyone must make that personal decision on what is best for them.

    Personally, I love my credit cards. They basically allow me to automate almost all my finances. I have never paid any credit card fees and pay them off in full at the end of each month. The accumulated points made December a “free” month for us.

      1. Don’t know if I would call it “working the system” We never got cards just for points and then cancel them. We used one card consistently with another as a backup only. We have had those same cards for over a decade.

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