From June 1, when the Usury Act will be replaced by new credit pricing for unsecured loans, credit card providers will be able to charge much higher interest rates than previously. This means the banks will be willing to lend to higher-risk customers and, as a result, there will be even more credit card offers out there.
It is important for the consumer to shop around for rates. If you receive a credit card offer and you want to take it up, first establish the interest rate you will be charged and find out if another credit provider is prepared to make a better offer. And remember that, although credit providers will have to assess whether or not you can afford the credit, only you will really know if you can afford it or not.
Ian Wood, financial services executive at Edcon, warns against taking up too much credit. ‘Using credit wisely and responsibly can make life easier when cash is short, but its ready availability can also lead to overspending,†he cautions.
According to the old adage, money is not everything, but when you have none because of indiscriminate credit card spending, you will find the damage is less about your financial circumstances and more about the impact on your life — on your relationships, your job and your health.
Unaffordable personal debt levels and the strains that accompany them are known to cause depression, end marriages, tear apart families and cause death through suicide and, indirectly, through the negative impact on your health.
According to Wood, a positive answer to any of the following questions could be a warning sign that you are falling into a debt trap:Â
Do you buy food and other necessities on credit?
Do you miss payments on your credit cards, thinking you will simply pay double next month?
Do you have more cards than you need and can afford?
Do you get a different feeling when you buy on credit than you do when paying with cash?
Do you have difficulty passing up a bargain when shopping?
If you want to stay clear of the debt trap, it is important to adhere to the following rules:
Before buying on credit, always ask yourself whether you really need the item or whether you can wait to save for it and then pay cash. Always plan before you buy anything.
If you can afford it, pay for necessities such as food or school fees with cash.
Know your debt and the cost of credit. Work out exactly what fees and interest you are paying off on each debt every month and make it a priority to pay off those debts with the highest interest rate first.
Make your repayments punctually and in full, preferably on or before the due date to avoid paying additional interest or fees.
Set up an automatic monthly payment from your bank to your credit card for the normal monthly amount. This way, you will never be late or jeopardise your credit rating. – Consolidate your debt. Enquire about interest rates and fees at your bank, because you might find it more cost-effective to borrow enough money from them to pay off all your debts at once, before focusing on paying back the bank.
Be honest with your credit provider. Let them know if your job status or salary changes. By keeping your credit provider informed, you are making it easier for them to help you should you fall behind on your payment.
If, for any reason, you cannot afford the payment, either write to or call your credit provider to explain the reason. Your provider will work with you to ascertain the amount you can pay if you undertake to catch up within a certain time period, or work together to find a smaller regular amount you can afford. As long as you stick to your promises, the credit provider is unlikely to take legal steps against you.
Take debt seriously. Remember, there are serious implications if you miss credit repayments. Each missed payment pushes up the interest and pushes you towards a bad credit record, making it difficult to get credit in the future.
If you have a credit facility, treat it with care. Do not use it for unnecessary expenditure and do not exceed the limit without seeking prior approval from your credit provider.
Do not despair. With self-discipline, honesty and careful budgeting, you can escape or avoid the debt trap.