Debunking credit card myths for your peace of mind
Many things have been said about credit cards but listen up, did you know it is safer to transact with a credit card compared to debit cards? Read on…
That credit cards are evil is perhaps the biggest myth peddled against credit in financial circles.
According to Amos Ngahu, a financial coach and owner of Money Clinic, credit cards are neither good nor bad. He is an expert, maybe we should believe him, but first, this is what he says.
“Credit cards are amoral. I have seen people who have saved situations with credit cards. We have also seen that if you travel outside the country, you will be able to transact because of their universal nature of acceptance,” he says.
How you use them determines whether the instrument serves you or sinks you into debt. Credit cards have received a bad rap, undeservedly so.
He warns that the information making rounds on the internet is mostly based on myths and is devoid of facts.
A financially irresponsible user will be negatively affected by a credit card. A late payment here and there will increase interest payments, for instance, but used wisely, the card can earn the holder money.
Rewards such as discounts, travel bonuses, cashback, and shopping perks are some of the benefits that credit card users can tap.
“With the universal acceptance, you will be able to transact business especially for importers,” says Amos.
Do credit cards equal bad debt? Here are some tricks
Credit cards have also been associated with bad debt. While these cards are a form of credit, it is good to remember that the user is the determining factor as to whether this card will sink them into debt or help them make smart money moves.
If one is worried about misusing it, they can set a smaller credit card limit and establish rules for its use.
Most people believe that interest starts accruing immediately when one makes a purchase. However, interest starts accruing a day after payment is due. If the user pays their balance in full before the lapse of the repayment period, they then dodge interest.
All credit cards available in the Kenyan market offer an interest-free period of between 30 and 55 days.
“You have a grace period to repay. When you use a credit card, money leaves you immediately but when you use a credit card you can take advantage of the grace period and if you pay on time, there are no penalties,” says Amos.
With a credit card, one can also access interest-free credit unlike other forms of debt such as digital and personal loans whose interest is calculated on the loan immediately it is disbursed.
Missing a payment is not a big deal
You might have heard that missing an odd payment here or there is not such a big deal but it is the surest way to affect your creditworthiness.
To be able to grow your limit, you have to make prompt payments, failure to which the limit is likely to be affected and the same transferred to other debt classes.
On top of the hit on your creditworthiness, a missed payment attracts other fees including late payment and over-limit fees.
If you are at risk of forgetting to make timely payments, it is always wise to set up a direct debit with your bank to offset the credit card bill.
Debit cards are superior to credit cards
Surprisingly, it is safer to transact with a credit card compared to debit cards. The former offers tighter purchase security than debit cards.
In the case of a fraudulent transaction using a debit card, money leaves your account and it might take months for the bank to secure a refund for their card.
With a credit card, however, money does not leave the holder’s account and no charges are made to the lost amount. All that one needs to do is notify the bank and the rest will be taken care of.
Some of the additional security features attached to credit cards include one-time passwords, pin, and chip technology, Verified by Visa (OTP) sent to the cardholder, safety apps, and authorization codes. Note, however, that credit cards also offer some of these security features.
Getting a credit card bites into creditworthiness
People believe that taking out any form of credit means you are suffering financially and therefore, it follows that taking a card only means you are cash-strapped therefore lowering creditworthiness.
This is further from the truth. By paying credit back within the repayment period, you prove that you are not a risky client and thereby improve your creditworthiness.
While this is true, it will wreak havoc on your financial health. Paying the minimum means you will be stuck with the debt longer than if you cleared the balance.
It also means that you will chuck more interest. Sometimes life happens and you end up only making the minimum payment but whatever you do, do not make this a habit.
Credit cards can be a welcome addition to your financial instruments especially when you understand the perks that come with them. As long as you use them responsibly, they will pay you to make transactions through cash backs, rewards, travel perks, and retail discounts.
The plastic gives you quick access to money during an emergency or when you are backed up in a corner financially.
However, if used irresponsibly, credit cards can sink you into deep debt.
“A lot of people feel like it is ready cash. It is not. We should never confuse it for cash,” says Amos, adding that if you are broke, you should surrender your credit card.
Budgeting when you have a credit card is important to limit misuse while ensuring all outstanding balances are paid on time.