A credit card allows you a credit limit that is provided to you by your bank or a credit card issuer (for example American Express or a supermarket store, or a beauty product store and others). Instead of a full loan – a credit card gives you a short term loan and you take as much of the limit you want each month or each time you spend.
Once you start using this card, know that you are spending money that belongs to someone else. It belongs to either your bank or the store that provided the credit card.
There is a cost attached to every bit of money you spend on these cards.
These charges are called interest and service charges. These charges and costs are over and above the amount you spend.
For example if you spend €100 on shopping, and the card charges you 10% interest on your balance each month, then the cost of your shopping and the amount you have to repay at the end of the month is €110.
Things you need to know before you agree to use or spend on this card:
The interest you pay each month
Is the interest charged on the whole amount you spend each month or the balance (the amount you owe to the card)?
Is there a compound interest charge? That is, interest on interest; (do they calculate the remaining balance including the interest charge, on which they add the current month’s interest?
Taking the example above into consideration, say of the €100 you have spent, you have repaid €70, then you owe the card €30. Would it be €30 +10% interest = €33; meaning in month 2 you would be paying €33+10% = €36.3?
The service charges; are they monthly or annual? Some cards charge from €50 to €200 (and more if you’re holding a premium card) for service charges. Some break it down to monthly charges, some to a one-time payment annually. This is in addition to the interest payment.
What is the minimum payment in order not to incur interest? What is the due date for that payment?
What does the card issuer consider as minimum payment?
Can you cancel this card at any time without additional charges/costs?
Each time you pay off what you have spent from the limit, you can borrow again.
Credit Card Minimum Payments
To avoid paying interest you would have to pay your full balance before your due date. Each credit card issuer has different terms, so ensure you know the minimum payment due date to avoid paying interest or a late penalty.
It is important to pay at least the minimum amount each time, each month to avoid late fee charges and a good credit history.
Are you spending more than you are earning?
Tip: if you were to spend from your savings or the money you can afford within your cash flow, you would avoid the additional costs in charges and interest that keep you always in debt and can create debt anxiety.