When spending on your credit card, it is important to keep in mind that the money needs to be returned. Although it seems like a simple concept, many people forget that incurring debt appears swiping their cards. Dr Christoph Nieuwoudt, FNB consumer segment CEO, says everyone can benefit from a better understanding of the purpose and cost implications of different credit products. Hence it is important to plan your ‘credit journey’, from entering the market to eventually owning your dream house and having more investments than borrowings.
Get it on credit
The temptation to get a store card, on top of your existing bank credit card, is strong. A number of retailers now offer cards that allow you to buy anything, from electronics to clothing. According to Dr Christoph, you may often find it easier to obtain retail or store cards because retailers don’t give you money. Instead, they provide ‘finance’ against your purchase of goods from their store. ‘While retail credit helps to facilitate access to credit, it may not be ideal from a value or cost of credit perspective,’ he says
A loan or not
Acquiring a loan for a home or car is often unavoidable as few people have the savings to fund such big purchases. But, personal loans should always be a last resort. ‘Many people opt for unsecured credit as there is no security or collateral required. The size of the loan and term as well as the pricing typically depends on their credit score,’ Dr Christoph explains. ‘Therefore, having a responsible credit repayment profile can assist you to access a greater amount of finance. It also reduces the cost and/or the repayments.’ Additionally, you should be cautious when considering loans with long repayment terms as the total cost of credit can be higher. Instead, use it to create long-term value and not for short-term consumption. Personal loans should be used for emergencies or necessities such as school fees and home improvements.
The future is here
Increasingly, bank have rolled out ‘tap & pay’ cards. Senzo Nsibande, head of card fraud at FNB credit card, says contactless payments create a convenient, flexible and secure payment environment for both consumers and merchants. ‘You don’t have to carry cash around. And, when you make a payment, the card never leaves your hand,’ he says. ‘The biggest advantage of tap and go is also its biggest disadvantage,’ says Tristan Naidoo, legal adviser at Old Mutual personal finance. ‘It is so easy to pay with your credit card that there is a risk that spending can become an automatic, almost mindless activity,’ he explains. In addition, should you lose your card, anyone will be able to use it without needing the PIN. This becomes especially problematic if you don’t have spending limits on the card.
Keep in mind
Pay attention when the South African Reserve Bank’s monetary policy committee meets to discuss interest rates as this impacts you because banks then either increase or decrease their interest rates dependent on this. ‘It is important to ensure that you have a financial plan that includes your short, medium and long-term financial goals. A financial adviser can guide you during turbulent times and help you stick to your plan, and assist you to cater for any interest rate increase,’ Tristan advises.
According to Dr Christoph, the ultimate credit product that is best associated with long-term customer value creation is the home loan. ‘In all interactions with credit, keep in mind the objective of one day owning your own property. This goes beyond just being responsible with credit and not being highly indebted, but also putting aside funds for a deposit if required,’ he says. However, a deposit is often not required for an entry-level house. ‘But, you still need to consider the total costs associated with buying a house, including furniture. This is because it is not recommended to finance furniture if you are considering buying a home,’ he adds. Some people may look at the amount of interest payable over a 20-year period and conclude that mortgage finance is expensive. But, consider the appreciation of the property value, and compare this perceived high cost to renting. This almost always results in a better financial outcome by purchasing.
Also see: Smart spending guide
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