Managing Credit Card Debt

September 26, 2022

A credit card is a loan product offered by banks and financial institutions. Its enables consumers to perform a wide variety of transactions both locally and internationally. When a customer transacts on a credit card, it is the lenders who pays the trader upfront for these transactions.  The customer in turn has to make payment for the value of transactions obtained to the lender at a deferred date.

The difference between a debit card and a credit card is that, a credit card is not connected to a personal bank account where there is access to funds already available in the account. A credit card is linked to the bank or financial institution that issued the card via their credit line. Similar to typical loans, credit card transactions are also subject to fees and interest charges which have to be repaid together with the amount that was borrowed.

A credit card may appear attractive as it enables the practice of buy now and pay later, consequently encouraging more spending compared to a debit card. It is therefore necessary to establish some rules for spending which may include deciding on a certain amount to spend each month, or to reserve the use of the credit card for emergencies.

Credit card interest rates vary slightly between the issuing banks, and generally these rates are steep in itself. The interest rate will impact the cost of carrying a balance on the credit card, and the interest charged is an additional expense for the customer. Benchmarking and opting for a lower interest rate will minimize the interest charges applied on outstanding balances, which will be more affordable for the customer to pay. The optimum way to avoid paying any additional interest charges is to ensure that all balances due, are paid on or before the due date of payment. Outstanding credit card balances are also subject to a credit card levy of 2% per Section 7G of the Income Tax Act 1974.

Opting for a credit card which offers more interest free days will provide additional time to make payments, compared to one which provides a shorter period of interest free days. Utilizing the interest free period well to plan purchases and make payments before by the due date will result in the purchases being virtually interest free.

Credit cards are an expensive means of obtaining cash. Cash advances are exempt from interest free days. These transactions are charged a combination of flat cash advance fee in the range of $5-$10 in addition to the daily interest which will accrue from the moment the transaction takes place.

Previously, the banks only offered visa credit cards which provided international and online usage capabilities. Now with the provision of visa debit cards, customers are provided the same usage capabilities at a cheaper cost. Visa debit cards are exclusive of the interest component charged on credit cards as funds are available and debited from the customer’s account and not obtained on loan. As there are no further payment processes and costs to consider on visa debit cards it may be a cost-effective product to select. 

The decision to obtain a credit card is a significant financial decision. Therefore, prior to making this financial commitment consumers must carefully weigh the pros and cons of a credit card compared to other similar products.