Smart Banking Guide

Credit Cards, Borrowing For Consumables?

Written on June 4, 2009 – 1:24 PM | by dodolovesme

Credit cards have become one of the growth sensations of this country since Mastercard and Visacard were introduced in the early seventies. They are the new super weapon in the never- ending attack on your rand and represent a bigger threat to your money tree than a plague of locusts. Living within your means is a constant battle — credit cards make it much harder.

The main credit cards today are Mastercard and Visa which are issued by banks and building societies, and the so-called prestige cards such as American Express and Diners Club for which you pay an annual fee ranging from $24 to $50.

As credit cards are accepted almost everywhere and Mastercard and Visa are accepted freely in most countries of the world, I see little point in paying out $50 per year for extra credit cards when the ones available for free will do the same job.

After all, the main purpose of a credit card is to save you carrying large amounts of cash and to give you money available for any purpose if an unexpected need arises.

However, Diners Club differs from other credit cards in that in the true sense of the word it is a debit card as purchases are immediately debited against the card-holder’s bank account. It does not allow the user an interest-free period like the other cards.

Diners Cards have no credit limitations and are mainly used by high net-worth clients and executive businessmen who do not want to be bothered by credit limitations. They are definitely NOT for the man in the street who might be tempted to purchase something that he really cannot afford.

Mastercard and Visa normally give you an interest-free period in which to pay for purchases, so by working around the due date of the card you may obtain up to 55 days interest-free credit. This all sounds wonderful in theory but in reality 55 days free credit on a small amount is not worth a lot of money and you may do better to pay cash and bargain for a discount from the retailer.

You can obtain cash advances on most credit cards and normally pay five to six percentage points above the ruling prime rate of interest on the amount you owe from the date of the advance. This can be a most useful and economical way to borrow money for short periods because there are no extra charges such as application fees or penalties for early repayment.

One of the best uses for credit cards is when travelling or holidaying. They save the need to carry large sums of cash and it is a comforting feeling to know that if an unexpected emergency arises, such as a car breakdown, there is money available to pay.

The interest rates charged by the different cards vary, and so does the amount of free credit you are allowed from the date you purchase something.

However, a word of warning to people who use revolving credit provided by credit cards. This credit is only interest free if the full amount in the account is paid by the due date. Even if only a minimal amount is left, interest will be incurred on all subsequent amounts accumulating as you purchase during the month.

Leave Your Credit Cards at Home

Getting a loan was a lot of trouble in the good old days if you saw something you liked and did not have the money to pay for it. You had to take time off work, make a loan application, wait for approval, sign documents, receive a repayment book and do all the other time-consuming stuff. Now all you have to do is pull out your wallet, hand over your card and 10 seconds later you are in debt.

Credit cards have a built in psychological factor which makes them harder to resist. When you pay with a credit card it does not seem that you are spending as much money as if you had to take out your wallet and count out the banknotes. It is not until the next statement comes that you finally discover how all those little items have added up to such a big amount.

If you are serious about becoming wealthy do as I do and don’t carry credit cards. If I walk past a book store with a credit card in my wallet I am worse than a child in a toy shop. Some internal robot will steer me inside and I will emerge an hour later with a heap of books. If you leave your credit cards at home, and see something you wish to buy, you can always ask the shopkeeper to put an item away for you and come back to get it later.

There is no use in pretending that we have iron wills. It is far better to acknowledge our human weaknesses and help ourselves by avoiding temptation. One of the greatest enemies of a savings plan is impulse buying and if you don’t carry credit cards you can’t fall victim to it. You will be amazed that when you get past that tempting item in the shop the desire normally goes away.

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Tags: borrowing, card, cards, cash, credit, credit card, credit cards, credit loan, free, interest, mastercard, mastercard and visa, money, spending