A credit card is a bank card that allows you to pay for goods and services on credit granted to you by your bank.
Traditionally credit cards have been issued as plastic cards with a magnetic strip and / or a chip, but increasingly banks are issuing virtual credit cards as well.
You have to apply for a credit card and the bank will check your income, your expenses and your ability to afford the debt you will need to repay, as well as your credit report and payment history before determining the limit you can spend on the card. Some banks may ask you for your balance sheet – a summary of all your assets and liabilities.
Unlike a loan, you don’t have to take the full amount upfront, but can use as much of the credit limit whenever you need it.
Every month you will have to repay some of what you have borrowed and the outstanding amount will attract interest.
As long as you pay the minimum each month and are within your credit limit, you can continue to use the card up to your credit limit.
To make a purchase
If you are making a purchase at a shop or restaurant or any other merchant that allows you to pay by card, you will insert the credit card into a card reader or tap your card over the card reader, so that it can read the security chip on the card.
You may also be asked to enter your PIN number.
The merchant's credit card terminal links to your bank and checks whether the card is valid and if there is enough available credit. If you do not have enough credit, the merchant will tell you your card was declined and you will not be able to buy what you want. You will probably be charged a fee for purchases that are declined due to insufficient credit.
When you buy online, you'll be asked to enter your name, the card number, the expiry date on the card, and the Card Verification Value or CVV number (usually found on the back of the card).
You can also draw cash from your credit card at an ATM or transfer cash to another account. However, be aware that doing this results in interest being applied immediately.
How the credit works
Each time you make a purchase, it reduces your credit limit. If you make a repayment it will restore some or all of the original credit limit, depending on how much you pay. Banks generally allow you to make repayments as often as you would like.
However, you should not forget that each month you have an outstanding balance, interest is added to that balance.
A credit card differs from a regular loan in that your credit limit is available to you again after you pay down the balance.
For example, if you have a R5000 credit limit and you buy goods for R750, your credit limit will immediately reduce to R4250. When you have paid off that R750 and any interest on it, you will again be able to spend R5000.
This is why you may hear a credit card referred to as revolving credit – it can be renewed.
How the interest works
The credit card issuer gives you a certain amount of time to pay back what you have borrowed to pay for goods and services before you are charged interest.
Depending on when you buy something on the card and when the bank’s month end is, you can get up to 57 days of credit before your purchase starts to attract interest. This would be the case if you buy something on the 1st of the month and your repayment is only due on the 26th of the following month.
If you buy something closer to the end of the month, however, the interest-free period will be shorter. And remember that if you draw cash, interest applies immediately.
If you don’t pay off your full balance before the end of the interest-free period, interest will be added to your balance.
The interest added depends on the interest rate at which your bank agreed to lend the money to you and the outstanding balance. There are, however, maximum interest rates that apply: the maximum for the year is the repo rate plus 14%.
How much do I have to repay?
Every month you have to make the minimum repayment on your credit card. Banks set this at between three and five percent of the outstanding balance. However, you should try to pay more than the minimum or your interest will quickly mount and the credit will turn out to be very expensive.
Ideally, you should pay off your credit card in full every month so that you do not pay any interest. When you do so your bank is effectively providing you with free working capital that you repay once your salary is paid. This approach requires discipline but will pay off hugely in the long run.
If you do not pay the minimum amount, you may incur late payment fees. The bank may also inform the credit bureaux which will record this on your credit record. Your repayment history is used, among other things, to determine your credit score.
Your credit score indicates how risky it is to lend you money and will be used by other credit providers to determine the interest rate at which to lend you money for the longer term and for larger purchases such as a home loan. Read more: What is my credit report?
Other fees
The fees your credit card provider may charge you in addition to the interest are also regulated by the National Credit Act.
Your credit card provider can charge you:
Remember
When you pay for something using a debit card, the amount you spend is deducted from your account immediately. When you use a credit card, you are borrowing and have to pay the amount back later, with interest, if you do not pay off the credit balance in full each month.
