I remember the very first time I got offered a credit card. That shiny, cool plastic card that would make all my dreams come true and create a far better life for myself. The reality, of course, looked somewhat different and it took me years of hard work and being constantly broke to finally clear my debt. Credit card debt and reckless lending practices are a major problem, not only in South Africa but around the world. But what are the misconceptions around credit and credit cards, and do they really have to mean a life of misery with the risk of debt counselling?
- Credit Cards Are ‘Free’ Money And Grant You Security
The reality is that you will probably spend more money if you use a credit card as it doesn’t ‘feel’ like you’re spending ‘real money’. Unless you pay off your balance on time (which most families don’t), you will be paying out a lot more in interest with the risk of you being blacklisted if you can’t meet your financial commitments and having to go into debt review. There is also the misconception that credit cards provide you with additional security as they can be used as an emergency fund. Yes, you will have immediate cash available to fork out for any unforeseen expenses, but you will also open yourself up to the risk of mounting debts. It’s much wiser to make use of smart saving tips to save up for a cash-based emergency fund in the event of unforeseen costs.
- Credit Cards Are The Path To A Better Life
In a world where status matters and owning the latest luxury brands will get you noticed, many South Africans are in actual fact living well above their means. A credit card can give you a false sense of security and lull you into believing that you are acquiring that luxury item at a lower cost than paying for it in cash up front. Unfortunately, you are actually spending more money if you don’t settle your balances in full each month, and worse still, you are borrowing against money that you haven’t even earned yet, so your chances of falling into debt and having to seek debt advice further down the line increases.
- Carrying A Balance On Your Credit Card Will Improve Your Credit Score
Many people assume that you need to carry a balance on your credit card to improve your credit score, but this is simply not the case. If you were to pay off your entire balance at the end of each month your credit score would be just as good as if you had a little debt on your card. The risk of carrying a balance on your card is that you will pay more in interest and may start falling behind with payments with the need for debt consolidation products in the future.
- Paying The Minimum Amount Is Enough
One of the biggest misconceptions about credit cards is that making the minimum payment required by the credit card issuer is enough to pay back your debt. Always look at the total current balance on your account and try to pay this off in full each month, if possible. Making only the minimum payment will lead to credit card debt and you will be paying out a lot more in interest, particularly if you’ve made more large purchases before you’ve even paid off the first one.
- Credit Cards Are Your Gateway To Freedom
Credit card advertisements often show happy couples enjoying a holiday in far-off, sunny destinations but whilst they may offer you the short-term freedom of going on a vacation that in effect you can’t afford at the time, you also risk falling into debt if you don’t have the resources to pay it off quickly.
The long and short of it is that a credit card can be a useful tool in establishing your credit history, provided you pay off your balance, on time, in full, on a monthly basis. It doesn’t, however, enhance your life and it’s far wiser to try living within your means and to save up for any big purchases. Ultimately the only path to financial freedom is to not owe creditors any debts or consolidation loans, to start saving something each month, and to plan for your retirement years.