Credit cards make cashless payments convenient and secure, whether you’re shopping in brick-and-mortar stores or online. They’ve been part of the financial landscape for most South Africans all our lives, and have made the mass adoption of online shopping apps much easier for many of us.

But credit cards are about more than just convenience. Did you know that there are times when using a credit card is a smart financial choice? If you know how to use credit cards responsibly and understand how they work, you can save on costs and reap financial rewards.

How do credit cards work?

A credit card gives you access to a preapproved amount of credit when you need it. The lender advances you money to pay for the goods or services you buy, up to a predetermined limit, and you pay that amount back in monthly instalments. These instalments will include interest, which is the fee you pay for borrowing the money, calculated as a percentage of the balance that you owe every month.

Like a personal loan, a credit card is unsecured debt. However, when you take out a personal loan for say, R5,000, the bank pays the full R5,000 into your account and you pay interest on that balance immediately. In contrast, if you have a credit card with a limit of R5,000, you are charged interest only when you use part or all of that R5,000. Even then, there is usually a grace period during which you won’t be charged interest if you pay the full balance.

What are interest-free grace periods?

Most credit cards are interest-free for a specified number of days. If you pay the full balance during this grace period, you aren’t charged any interest. Nedbank credit cards give you 25 days from the date of your monthly statement to pay the full balance before charging interest. Depending on when you make a purchase and when your next statement is issued, this can translate to up to 55 days interest-free.

You should note, however, that interest-free periods apply only to eligible spending, which will vary according to the terms and conditions of your credit card account. For example, if you use your credit card to draw cash at an ATM, most credit card providers will charge you interest, even if you pay it back during the grace period.

What is the difference between straight and budget?

When the card machine gives you a choice between ‘straight' and 'budget’, you can choose to pay the amount over a longer time. If you choose ‘straight’, the entire amount is added to your balance. If you want to avoid paying interest on that amount, you must pay the full straight balance within the grace period.

Budget transactions, on the other hand, divide the amount into equal instalments and then add that instalment to your straight balance every month. You can choose to pay budget transactions off over a set number of months, from 6 to 60. Your budget facility makes larger purchases more manageable by spreading out the payments, but remember that your monthly budget instalment will already include an interest component when the instalment is added to your straight balance. If you want to avoid being charged interest on that interest, you must pay the full straight balance every month within the grace period.

Why use credit cards if you don’t need to borrow?

It might seem puzzling that wealthy individuals use credit cards, if they don’t need to borrow money. But apart from convenience and the added security of not having to carry cash, credit cards offer many perks, including rewards programmes, travel insurance, free access to airport lounges, and purchase protection.

By making the most of your  credit card benefits, you can invest the money you save into financial products that earn interest and grow your wealth. The key is to manage your credit card spending carefully enough to be able to pay the full straight balance every month and avoid unnecessary interest.

Choosing the perfect credit card

There are many credit cards to choose from, and the right card for you will depend on your individual situation. Your income, credit record and preferred benefits will all factor into your decision. Don’t base your choice solely on the interest rate the lender is offering – consider the monthly fees, rewards programmes, and extra features to find the best fit for your needs. Contact us if you have any questions about Nedbank credit card options.