Credit cards have become a common electronic payment instrument. A credit card is relatively easy to obtain and easy to use, availing oneself of one’s credit limit! Some people find they do not have the discipline to control their spending especially when it is conducted on a credit basis, and thus make the sensible decision to do without a credit card. Another option would entail that if you are after the convenience but do not want to get into debt, one can opt for a debit card instead. Please read on!
- A form of short-finance, allowing goods and services to be purchased sooner, even if at a greater cost, than if we had to save up for them
- A convenient payment instrument, reducing the amount of cash that we carry around especially for travel purposes, suitable for conducting purchases over the phone and online
- May be combined with attractive rewards programmes
- Useful as a source of emergency funds
To qualify for a credit card…..
If you are over 18, you may qualify for a credit card. Your bank as the card issuer will carry out a credit scoring exercise to assess whether you are eligible for such a card.
If you are under 18, you may qualify for a credit card if you are an additional cardholder. For example a member of your family (your mum or dad) may have a credit card in their own name and the bank issues a card to you as an additional or ‘supplementary’ card holder. However, the main cardholder remains liable for all amounts owing, including any losses from a supplementary cardholder’s negligence.
How do credit cards work?
A credit card is different from a debit card. This means that it does not remove money from the user’s account after every transaction. Unlike repayment on a traditional loan such as a car loan, credit cards do not allow you to spread the amount you owe for a fixed period of time. Instead, you are required to make a minimum monthly payment, which is the smallest amount you can pay and still meet your cardholder agreement, that is the terms you agree to when signing up for the card. The minimum payment is usually between two (2%) and nine (9%) per cent of your outstanding balance. Unfortunately, by paying only the minimum each month instead of paying off your entire balance, your debt will continue to grow
Questions you need to ask yourself before applying for a credit card –
- Do I need a credit card?
- Will I be able to afford it?
- Will I be able to meet the monthly payments?
- If I decide to apply for a credit card what should I look for?
- What are the charges applicable on the card that I am aiming to choose? What is the relative APR – APR stands for Annual Percentage Rate of Charge. It is used to compare different credit and loan offers.
- What is the annual fee?
- Any interest free periods?
When should I use a credit card or make use of credit?
As a student/young adult, you will have to decide for yourself if you can handle the responsibility of a credit card. Credit cards are easy to get but not so easy to manage, especially if you end up with a high unpaid balance on which interest is accruing, and no payments are being made. Knowing when to make use of credit is the difference between purchasing what you need and paying for it or finding yourself in a situation of unbearable debt. The following are acceptable reasons to make use of credit –
- Purchase of items which will result into cost reduction
- Purchase of a necessity
Advantages of credit cards
Like loans, credit cards can enable you to build a positive credit history. This can enhance your ability to seek a future personal loan or a home loan. Of course, there are other advantages to having a credit card including:
- Cash availability in the case of an emergency
- A good substitute for cash
- Automatic record keeping and reconciliation through payment chits and statements viewable through internet banking
- Online shopping
- Combining many purchases into one payment
Disadvantages of credit cards
Credit cards can be helpful in emergencies of if you are able to pay off the balance each month, but be wary! Credit cards can also get you into trouble! As already indicated, they may be easy to get but not so easy to manage. Also caution should be exercised in view of –
- Impulsive spending increases
- Temptation to overspend
- Purchases of non-essential items
- Misuse of the card which can lead to problems with your bank tarnishing your credit history
Will I be safe should I settle the minimum monthly payment only?
Although it may seem good to see that you have only a small amount to pay each month, in the long run should you continue to pay the minimum payment only, you will never be able to extinguish the balance due. If you keep paying the minimum payment it might give you the feeling that you are on the top of your bills and taking care of your responsibilities.
This is a false illusion because if all you ever pay is the minimum, it will cost you money. Paying only the minimum payment amount or only a few euros over it, will likely take you around 20 years to pay off your debt! With interest added, you debt will be more than DOUBLED!
The safest way is to carry no balance at all. If this is not possible as is generally the case, then you should pay at least between 7 to 14 euro above the minimum. This will also help you to slide a month or two when unexpected expenses arise.
If I get behind on my monthly payments, what should I do?
This is a situation that is easy to get into but tricky to get out of. The following tips serve as precautions should you feel that you are not able to meet the payments:
- First cut any recreational expenses
- Liaise with your bank to see if they can work out a new repayment schedule
- Develop a budget and stick to it. Having an excess amount of credit may damage your credit history and your eligibility for future loans
- Use a debit card instead
Debit cards are different from credit cards. While a credit card is a way to pay later, a debit card is a way to pay now. Using a debit card means you are utilising balances on a current or savings account. This means that debit cards allow you to spend only what is on your bank account.
How is interest on a credit card charged?
Interest is generally either charged from the date of purchase of items or from the date your monthly statement is issued. For cash advances, interest is usually charged from the date of the withdrawal. Conditions binding on the usage of your card should be reviewed thoroughly before application goes through, so you can check the fees apart from your obligations as a cardholder. You will most probably be better off with a card that only applies interest from the statement date.
Will I be charged fees on my debit card?
Banks in Malta will give you a debit card for free, thus no fees will be charged when acquiring a debit card.
Advantages of debit cards
- A debit card is easier to get than a credit card
- A debit card frees you from carrying any cash or cheque books
- Using a debit card instead of writing cheques saves you from showing identification or giving out information at the time of the transaction
- Debit cards save you from carrying cash when travelling abroad and are also more readily acceptable than cheques
- Debit cards do not have any interest applied as in credit cards
Disadvantages of debit cards
To make a purchase you need to have the money available in your bank account.
(As you can see, the advantages outweigh the disadvantages)
More on fees……
Fees can add a lot to the cost of your card. Commonly charge fees include –
- Annual account fees
- Fees on usage of rewards programmes
- Fees for late payments
- Payment dishonour fees
- Fees for exceeding your credit limit
Fees relative to investigation of disputes in regard to payments effected with the card Fees must be disclosed and if amended notification to cardholders should be given two months prior to the application of such amended fees. Card issuers publish their fees on their Internet websites under their Tariff list. Terms and conditions applicable on cards give the card issuer the right to increase existing fees and impose new ones. Shop around to establish the relative fees chargeable by different card issuers. Last updated: Jul 03, 2017
You might find the section on using debit and credit cards – your rights explained useful…please click here.