A fortnight ago, I organised a financial education training workshop for a local commercial bank’s credit card holders on the theme: “How to eliminate debt with a credit card.” The workshop was aimed at equipping the customers with every day money-management skills.
During the training, which was the first of its kind organised locally, I observed that many first time credit card holders were chiding the service and attributing it as a source of their financial woes. Many of them were full of regrets for having secured the cards.
This prompted me to ask one question, which revealed all the mistakes that many credit card holders make — how do you assess whether you need a credit card service?
Interestingly, none of the participants appeared to have a clue or even an appropriate response.
Surprisingly, most of the credit card holders cited they secured the cards to bridge a deficit in their monthly incomes.
While most credit card issuers often do credit appraisal based on the level of creditworthiness and the ability to pay as evidenced by a payslip, seldom do credit card applicants take time to assess whether they really need the service. Certainly, one’s creditworthiness or payslip does not qualify the need to own a credit card. Similarly, just like a bank loan, you may qualify for a credit card but that does not mean you need to have one. You may as well do with only your savings through an ATM or debit card.
A credit card simply allows you to expend what is not yours with an obligation to pay at a later date.
To assess whether you need a credit card, consider the following:
Having control over your finance
Do you have control over your finances? How do your monthly expenses compare with your monthly income?
If you have some control over your finances, then certainly you must have a budget. Should you find that your monthly expenditure somewhat exceeds your monthly income, then you urgently need a budget; not a credit card. Most credit card holders fault at this point.
They rush for the service whenever they cannot meet their monthly expenses, a move that will only plunge them into a bottomless debt pit.
Should you find that you have some control over your finances, then you still need to exercise caution. Before you opt for a credit card, ask yourself whether you can, instead, do with only a debit card.
With a debit card, you will be accessing and expending your own cash and at no extra cost.
How prompt and regular is your income?
Some participants in the forum cited that they only go for credit cards whenever they encounter frequent salary delays at their workplace. Certainly, this is not a sufficient reason to rush for a credit card.
Assess how promptly and regularly you receive your monthly income. If you encounter frequent salary delays, then even before you rush for a credit card, make sure you have a budget.
This is because you will be spending what is not yours with an obligation to pay at a later date with interest. Remember that there is a tendency to impulse spend whenever there is a salary delay.
Frequent salary delays could also affect you as you may not be able to meet your debt obligation on credit card. Every credit card has a limit that you must settle within a given period of time, failure to which you incur a penalty.
How promptly do you pay your other post-paid debts?
You could have a clean credit report as stored with credit reference bureaus but still have a tendency to procrastinate when it comes to settling your other post-paid debts.
If you find yourself procrastinating in paying your telephone and electricity bills, then a credit card is not suited for you.
Ability to meet your debt obligations promptly
Most bank customers rush for credit cards as their sole source of income either after a job loss or when looking for a job. This is a fatal move, which should be discouraged.
A credit card without a regular source of income is a debt trap. You need to have a consistent and regular income with a budget to qualify for a credit card.
If you rely on irregular income such as commissions, then try to keep off credit cards unless you have budget in place. Interestingly, most irregular income earners spend devoid of a budget since they can hardly figure out the size of their next paycheck.
Irregular income can also turn out to be your financial undoing since you are likely to find yourself unable to settle your credit card debt in full, especially when your paycheck turns out to be meagre.
In addition, with irregular income, it will be difficult to figure out how much debt or a credit limit you can comfortably service per month without any financial distress.
Mr Opiyo is a personal financial coach.