Sometimes you just have to hit that reset button, right? It’s all about starting with a clean slate and a refreshed winning mentality. So, if you’ve done that, you are well on your way to reaching some of your goals. Congratulations! Whether it’s short-term ambitions, like travelling or long-term, such as buying a home, most of us don’t have excessive amounts of disposable cash lying around to turn those dreams into reality. Thankfully, there is a humble piece of plastic that can empower you financially. So let’s take a closer look at how to apply for a credit card and use it responsibly.
How to apply for a credit card.
The first step to applying for a credit card is to call your bank and ask what documents and information are necessary for a credit card application. Different institutions might have different requirements and criteria, but, generally speaking, you will need to provide the following:
- Your valid ID card or book
- Your most recent payslip (at least three months’ worth) or proof of income.
- A document from South African Revenue Services (SARS) with your income tax registration number (less than one-year-old).
- Proof of residential address, for example, a recent utility bill, a signed copy of your lease or rental agreement or a current municipal rates and taxes invoice.
Added financial security: the convenience of having a credit card.
It’s essential to view a credit card as a financial tool, and not something that allows you to continually spend outside of your means (we’ll touch on this later). Of course, life can throw its fair share of curveballs your way, so a credit card can help you if you need access to some money in an emergency. The credit card repayment allows you to pay instalments over a period, which means you won’t suddenly find yourself in a financial rut. As FinCheck puts it: “ Credit cards can be like weapons, dangerous in the wrong hands, but sometimes you’re glad to have one”. Other benefits include being able to use a VISA or Mastercard credit card almost anywhere in the world so that you have some extra peace of mind while travelling. Most credit cards have a reward programme, which means you can get discounts on flights, hotels and car rentals (depending on your specific credit card, of course). But one of the biggest pros of using a credit card is the opportunity to build a positive credit score, which will ultimately help you unlock some of your bigger goals.
What is a credit score, and how does it help me?
At the end of every month, credit providers send your loan record and repayment history to various credit bureaus. They then use this information to build your credit report and, ultimately, determine your credit score. As TransUnion points out: “ A credit score is a three-digit number[…] is one of the factors that helps lenders evaluate how safe or risky you are as a customer. Remember, each lender will have their criteria on how to assess your risk for your credit application”. A favourable credit score tells institutions that you are a reliable and responsible customer, and will likely give you a lower interest rate on paying back a home or vehicle loan.
How to best use a credit card to get a good credit score: become a credit-conscious consumer.
As with most things in life, applying for a credit card and using it best is about being responsible and consistent. This means managing your spending and repayment to ensure a healthy and positive credit history. DebtBusters, a company LAW FOR ALL partners with to assist policyholders with debt-related issues, recommends the following to help you use your credit card responsibly:
- Ideally, you should try and set up your budget so that you are in a position to pay the full purchase amount back within the “grace period” before interest is charged (usually between 30 and 60 days, depending on the institution).
- If you are not able to repay the full amount, make sure you set a fixed amount of your salary to pay towards your credit card. Always try and repay a little more than the recommended minimum. This will lighten your debt load and save interest costs.
- It’s best to keep your planned repayment period as shorts as possible, because the longer you take, the higher your debt will be.
- Remember, the loan amount’s immediate repayment during the interest-free period will reflect positively on your credit record.
- Do not max out your credit card.
Don’t get tempted to overspend and fall into debt.
You should never forget that having a credit card is a form of borrowing money, which means you have to pay it back. Being inconsistent or irresponsible about repayments can have devastating consequences. “You’ll rack up interest at a high rate. A high Annual Percentage Rate can drag you deeper and deeper into debt if you don’t pay off your balance quickly, or if you only barely make your minimum repayments,” warns FinCheck. Other amounts that can add up quickly include penalties for late monthly repayments and exceeding your credit limit. Defaulting on debt repayments can be expensive and have profound legal implications. You could be blacklisted, handed over to debt collectors or even sued in court.
Consumer protection: The National Credit Act.
Thankfully, when applying for a credit card, the onus to responsibly enter into a credit agreement doesn’t solely rest on the consumer. In South Africa, the National Credit Act (NCA) sets out specific rules that credit providers must adhere to, to protect consumers and make credit and banking services more accessible. “In a nutshell, the law protects consumer rights, by prohibiting unfair credit and credit marketing practices, ensuring credit agreements are easy to understand and barring “reckless lending” (when the provider doesn’t conduct an affordability assessment), amongst other rules and regulations,” says Adv. Jackie Nagtegaal, LAW FOR ALL’s Managing Director.
In terms of affordability assessments, a credit provider must:
- Take measures to determine if a consumer can afford the credit based on their discretionary income (i.e. cash left over after deductions).
- Confirm and validate a consumer’s bank statements, payslips or any proof of income (over three months).
- Check the consumer’s credit profile (for maintenance obligations or other debt repayments).
- Look into the consumer’s debt repayment history seven days before the approval of a new credit application.
- Be transparent about all the costs involved, including the interest, initiation fees, service fee and original debt amount.
- Be willing to give the consumer a quote so that they can compare deals from other providers.
Failure to carry out any of the above when approving a credit card could be deemed irresponsible and “reckless” in the eyes of the law, and providers could find themselves in legal hot water.
The Act also established the National Credit Regulator (NCR) to regulate the entire credit market and the National Consumer Tribunal (CT) to adjudicate any consumer complaints and disputes with credit providers, contraventions of The Act and decisions of the Regulator.
What can I do if I am struggling to pay my monthly credit card instalments?
Unfortunately, this is a reality for many South Africans. As Business Times reported: “ Research by Old Mutual shows that 56% of South African credit card holders pay the minimum instalment, and only 16% pay their balance in full at month-end”. As mentioned before, don’t just ignore these payments and leave your debt to pile up; there are many consequences. The best way to approach this is to nip it in the bud as soon as possible. Sit with a statement of your income and expenditure every month, and identify where you can make some short-term sacrifices ( for example, a Netflix subscription and takeout dinners aren’t essentials) to free up funds to go towards your monthly credit card repayments.
You want to avoid getting dragged into more and more debt, as it’s even more daunting and stressful. But if it gets to that point, there are many effective debt management solutions at your disposal. “It’s understandable if you are feeling overwhelmed by your current financial situation, but not only is the law on your side, there are legal processes to help you regain control and find a way to repay the money you owe,” adds Nagtegaal. For the full breakdown of how these processes work, read our comprehensive Debt Review, Administration and Sequestration feature. Of course, because all of these options can be complicated and often need the assistance of a Debt Counsellor or Debt Administrator, it’s best to talk to your lawyer for advice.
We’ve got your back!
If you are drowning in credit card debt, why not get in touch? LAW FOR ALL can mediate with your creditors to reach a debt repayment agreement. What’s more, we partnered with DebtBusters, an award-winning debt management company, to assist our clients with debt review, sequestration and administration. For more about our policy benefits, see our Policies.