Making sound financial decisions will not only secure your financial future but knowing when to make use of a credit line is key. If you’re considering applying for a credit card, Chief Operating Officer, FNB Credit Card, Gareth Rimmington sheds some light.

Before applying for a credit card, familiarise yourself with the basic components of how it works, this includes concepts that are true for all debt. Credit ultimately is borrowed money and you will need a basic understanding of interest and repayment expectations,”explains Gareth. And if you’re certain you’d like to proceed, “have proof of income available if you don’t already bank with FNB, for example, when applying for a credit card. Ensure that you submit any extra required documents timeously to speed up the application process. And most importantly, “read terms and conditions thoroughly, and ask any questions if you don’t understand the terms and make sure you understand the cost of credit in respect of interest.”

Credit application, credit card, financial future — Unsplash

Glamour: What do I need know about the interest rates?

Gareth: Interest rates are quoted as an annual interest rate compounded monthly. A simple understanding is that if you are quoted a 12% interest rate on a R100 balance. Then your monthly rate is 12% divided by 12 which is 1%. 1% of R100 is R1. Compounded means that if you do not pay off your previous interest as a minimum then your interest will also earn interest. This will only happen if you miss an instalment.

• Interest rates are also variable and are prime rate linked. We are in an increasing prime rate cycle so it is important that customers budget higher repayments to ensure that they can afford the repayments when interest rates rise.

• Interest rates quoted will be based on your credit profile which is primarily determined on how you conduct your credit behaviour (which is captured on the credit bureau).

• The interest rate is the same whether you are using your straight or budget facility.

Glamour: What's the difference between straight and budget and what are the implications for each option?

Gareth: A 5% minimum instalment is due on straight balances but you will use straight to manage their monthly expenses. Whereas a budget is a way to fix your instalment to a fixed term so that your repayment is consistent over your desired term. This is often used for bigger ticket items to manage cash flow.

Glamour: How do I use my credit card responsibly?

Gareth: Don’t use a credit card to increase your lifestyle wants. A credit card is there to help you manage cash flow. However, it still needs a good balance by budgeting appropriately. A credit card also assists with bigger ticket purchases to pay off a balance over multiple months.

• Where possible pay more than the minimum to minimise interest charges that can build up appropriately.

• Avoid getting close to your limit and make sure the limit you apply for is in line with your needs.

• Credit cards also offer benefits such as increased rewards on eBucks so a well-managed credit card can be a positive tool to aid your finances.

Glamour: How do I use it in a way that it improves my credit score?

Gareth: The most effective way to use a credit card is to have a very low balance, repay in full monthly, and keep hold of the account for a long period.

Glamour: Is it a good idea to accept a credit limit increase?

Gareth: Only when you are in need of a credit limit and you have appropriately budgeted for the increased instalment. For larger purchases, a limit increase may be necessary but if you are no longer in need then a positive step to manage debt will be to reduce your limit to a level in line with your monthly expenses once the larger debt has been paid off. If you take a limit increase for future needs it does not cost you additional money, only when you start spending against it.

Glamour: What are the common terms I should familiarize myself with?

Gareth: Interest, Interest free period, instalment, fees, payment due date, DebiCheck, budget period, limit, balance and statement.

Expert tips for using a credit card responsibly

• Budget and set an appropriate limit

• Pay off the full balance monthly on time

• Don’t withdraw cash as it earns interest immediately

• Rewards are great but never better than ensuring that you can pay off your full debt commitments first

• Use your FNB virtual card as it protects you from fraudsters. It is also a very convenient payment mechanism on your device.

• A credit card and cheque account bundle can save you money than having each product separately.

• The most convenient way of paying your credit card every month is by debit order on the day that you receive your salary or income. This way you don’t have to remember to make monthly payments.

The pros and cons of having a credit card according to Gareth

Pros:

• Improved cash flow management, a proactive means to improving your credit profile, improved rewards via eBucks as well as great partner offers, up to 55 days interest free credit, automatic debt protection, purchase protect options and extended warranty.

• You get up to 55 days interest free if you settle your credit card in full.

• FNB Purchase Protect is a value-added benefit for items purchased with your FNB Virtual Cards which covers your items against theft or damage.

• Extended warranty allows customers to extend the warranty of electronic goods purchase with their FNB credit card by up to 24 months.

• Credit cards are accepted internationally wherever you see a Visa sign. This makes it convenient for international spend / travels.

Cons:

• A mismanaged card can balloon debt obligations and thereby put a client into a position where their earned income is being used to service old debt as well as interest.

• Missed payments can also damage credit bureau profile which will adversely impact other forms of debt applications like vehicle finance and home loans.

• Missed payments and transactions when limit is fully utilised can incur extra fees.