Credit card mayhem … are you robbing yourself blind?

If you spent R2,000 on a purchase today, would you have bought it if you knew that ultimately you would actually be paying R2,500 for it?

At Veritas Wealth, we spend most of our time managing people’s wealth. We don’t often spend too much time talking about how they spend it. When we slow down the conversation and discuss how they use a credit card and their understanding of how it works, the results are often startling. It appears that across age groups, cultures and gender that there is a great deal of ignorance or lack of understanding about credit cards.

Two rules to remember about credit cards or store cards

1. If you do not pay off your total debt at the end of a month, you are in financial trouble.
2. If you buy something and put the payment onto budget rather than straight, it means you cannot afford what you just bought.

A credit card limit is a helpful facility, not a target.

The KISS principle

Keep It So Simple

A credit card allows you to buy something during a month, without having to use cash or transfer the money online. It is very useful. The credit card should always be paid off at the end of the month. If you cannot pay it off in full, then you cannot afford to buy the goods this month!

What are the common misconceptions?

“I pay my credit card off at the end of the month?” – Really, do you? Or do you pay off the minimum amount that the credit card company is happy to facilitate? Typically, if you owe, R60,000 on a credit card (maxed out), the credit card company will only ask you to pay, for example, R6,000pm. Too many people believe that this is paying the credit card off that month. This is wrong!

For example, if you are currently in debt for R60,000 the credit card company will inform you that you only have to pay off 10% per month, as a minimum payment. You can now spend a further R6,000 again next month. Generous people these credit card companies. Or are they? What they are not highlighting is that you are going to pay 23% interest on this money.

To put it in perspective, a 23% return a year is near impossible to get in any stock market anywhere in the world consistently. On R60,000 this would be an extra R13,800 in interest after 12 months.  So based our earlier question above, it’s worth considering again, i.e. if a R2,000 purchase today will cost you R2,460 in 12 months, is it truly worth it?

Why are credit card companies so amenable?

First of all: have you ever noticed how many companies are happy to give you a credit card or a store card? Think about it. Gyms, airlines, shops, banks, and more. Why? They get to sell their products earlier than you could afford them. They also want to keep you in debt for as long as possible, as for them, it’s extremely profitable.

How do I get out of this situation?

First of all, it is a common mistake, so don’t beat yourself up. Take steps to start fixing it and keep moving forward.

Here’s an exercise to help you get started. Sit down and track how you spend your money, then work out where you can cut back a little. Select those expenses you can do without and allocate that amount to your credit card, to speed up your monthly payments. If you are a spender, we know it’s going to be difficult so you need to start by owning it and we suggest to start by using the ‘seven-day rule’. Here’s how …

If you are shopping and about to buy something, put it back down, walk out of the shop or log off from the site and promise yourself that you will come back to it in seven days.  If you still want it seven days down the line, you can buy it. However, chances are you won’t and this money can go towards paying down the debt.

It will take most of us a few months to get there. When you start to make inroads use the opportunity to give yourself a small inexpensive token of celebration (but go easy!)

In summary:

1. When you pay your credit card off at the end of the month, the balance owing must go down to zero. If you don’t do this, you must understand you are losing money hand over fist.
2. Credit card companies and store cards do not want you to pay off your debts, they make a fortune from your lack of understanding.
3. Realise that paying that level of interest is a financial crime and you are stealing from yourself! You may end up having to work longer e.g. by more than a year to pay off this interest.
4. When you are at the shops and the person at the till asks you, “Budget or Straight”, what they are really asking you is, “can you afford it”. If you answer “Budget”, you now know you cannot afford it.

It is worth getting upset about this ongoing debt. Research has found a correlation between bad debt and stress. It affects you physically and emotionally and can even take a toll on your family and married life. Fixing your excessive debt could equate to changing your life. Make that first move, it will be your first steps to financial freedom!