Question:
I am a 24-year-old, unmarried woman with a car and a place that I rent.

I recently received my first credit card and would like to purchase a TV as before I was living with a roommate and we used hers. I am not looking for anything extravagant and would like to cap the cost of the TV to R2500.

How much will my monthly repayments be?

Answer:
Well done on thinking through the use of your credit card before blindly going about and using it! The problem with most credit cards is that there are no forced payments, aside from servicing the debt. This is where things start going horribly wrong for most of us as we tend to take as much as we can get without giving back. With this in mind, there are a few things I recommend you consider not only when buying your TV, but also when making use of your credit card in general.

Firstly, have a repayment strategy in place before you pay. For example, if you have an overdraft facility on your credit card of R2500 you should commit to paying that off in a structured way, maybe R200 a month. This is often tough as we do not have to make these repayments.

For this reason, many people end up living dangerously close to their maximum overdraft limit. This can be very costly as most credit cards charge interest of between 22 and 26 percent. This means that if you stay close to your maximum allowed overdraft you will pay about a quarter of your overdraft per year in interest alone, without making a dent in what you owe.

If, on the other hand, you pay your TV overdraft of R2500 back at R200 per month, you will have paid off your overdraft in just under 15 months. The total cost, with interest, will have been just over R2900 — an extra R400. This might not sound like much, but if your overdraft were ten times as much — as it might be in future — the same habit will start costing you ten times more.

If you are not disciplined about making your payments, you will end up servicing the R2500 overdraft indefinitely at a cost of about R600 per year. After a few years, this starts adding up to much more than the TV is worth.

So what are the rules to keep in mind when using your credit card overdraft?

1. Do not use your overdraft, unless you absolutely have to!

2. To keep temptation in check, ask the bank to keep your overdraft to zero. And do not succumb to temptation when they offer you one later.

3. If you have existing credit card debt, pay a fixed amount into your account each month that equals more than the interest you owe.

4. Once your outstanding balance starts coming down, ask your bank to bring down your overdraft facility accordingly.

5. On payday, make sure you pay the bank first. You can spend whatever is left.

So, where does this leave you and the TV? I strongly suggest you save and pay cash. Buying the TV on credit could lead to bad habits that will severely hamper your ability to become financially independent.

But if you really, really want the TV now, try to pay it off in as short a time as possible. Committing R800 each month over three months would be a good start as many credit cards do not charge interest during the first 55 days.

I know this is probably not the advice you want to hear, but believe me once you’ve got the rules down, you’ll be grateful for the rest of your life.

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