Think twice before swiping that card

A friend of mine who has been using a credit card for several months was recently surprised at how far banks were willing to go to ensure his financial ‘comfort’.

 This friend, let us call him Jack, likes making purchases  using his credit card and repaying 100 per cent at the end of every month.

One day,  he suddenly realised the bank had blocked his card.

He was surprised because he had never defaulted on his payments. He went to  the bank for an explanation.

“The bank official told me they had monitored my card and thought I was straining because after paying my monthly expenditures, my account remained almost empty…so  he suggested that I pay 50 per cent of my bills instead of the 100 per cent I was used to,” explains Jack.

A critical look at what the bank wanted Jack to do reveals that the bank would be the ultimate beneficiary since paying the way they recommended means additional interest on the credit carried forward.

Jack pays Sh2,500 as the annual fee for the credit card.

If you pay 100 per cent promptly every month, there is no interest accrued meaning the only cost you incur is the annual fee, which in  Jack’s case is Sh2,500.

However,  after Jack changed his repayment plan to 50 per cent, it meant the remaining 50 per cent is carried forward,  attracting a 3.5 per cent interest.

This may sound logical since it gives Jack more time to repay but ultimately it proves expensive.

Today,  banks are literally ‘hawking’ credit cards to clients in the hope of increasing their income portfolio.

Most banks allow customers to repay anything between 5 per cent to 100 per cent. Of course, the longer you take to pay, the more expensive it becomes. So watch out.

Credit cards  encourage you to spend more at very high interest rates which is why the card companies or banks coax customers to own one.

Always endeavour to repay your credit in the shortest time possible. In fact it would be wise to repay 100 per cent every month to avoid paying interest. Otherwise the best option would be to use cash instead of entering a cycle of  indebtedness.

According to one online financial advisor, by spending more than they can actually afford each month, individuals end up paying very high interest charges each month.

Because you are only billed once a month, it is also very easy to forget about purchases you have made using a credit card. You may end up with a very unwelcome surprise at the end of  the month once you see just how many purchases you signed for during the past 30 days!

Any unpaid balances are charged very high interest rates that will quickly add up.

 If you continue to pay only the minimum amount, your unpaid balance can easily become unmanageable.

Credit cards can be dangerous for people who are not good at budgeting.

It  is very easy to overspend because you don’t need to pay for your purchases upfront.  Somehow,  signing a piece of paper at the time of purchase doesn’t always feel like you are actually spending money.

Financial experts argue that if you cannot trust yourself with a large credit limit then call your provider and demand it to be lowered.

Spending when abroad
Whenever you use your credit card abroad, depending on your bank,  you can be charged around 2.75 per cent for the foreign exchange loading fee and then a handling fee of around 2.5 per cent if you draw money out from a cash point machine or bank.

According to Mr Steve Kamau, Group Business Development manager, Credit Reference Bureau of Africa Ltd, out of the total loan defaults reported between August last year and this year, 23 per cent were credit card related.

CRB provides those who subscribe to it such as banks with solutions to credit risk management such as payment history information of individuals and corporates.

Credit card basics:

If you do decide to use credit cards, remember these simple rules:

Regularly check all financial statements such as bank and credit cards to detect possible fraud.

Never reply to any email from your bank or Credit Card company possibly suggesting there has been some fraud.

These emails are scams, which are trying to trick you into entering all your login information.
Keep track of all your purchases and don’t spend outside your budget.

Pay off your balance on all of your credit cards at the end of each month.

Don’t loan your credit or give out your credit card information to anyone, but reliable companies.

If you use a credit card and then pay just the minimum payment each month then the debt will go on for years and you will pay a great deal more than the ticket price of that item if you include the interest paid.

On international trips
Got an international trip coming up? Remember these key credit card to-do’s:

Select two of your credit cards (at least one with cash advance privileges) for your trip.

Call your credit card’s customer service department prior to traveling internationally. Ask them:
If you can use your card in your destination country.

How much your spending limit is so you do not go overboard or get stranded in any way.

What insurance benefits are provided by your credit card (rental car accidents, lost or damaged items, etc).
How to contact them should you lose the card.

Provide dates of your travel and a telephone number where they can reach you.

For any ATM transaction, be sure you know your PIN number.

If you do not have this number somewhere, contact your bank and request a new PIN at least two weeks prior to your travel.

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