How Credit Cards Work

08 NOVEMBER 2023

When looking to acquire credit, you are often faced with two popular options in personal loans and credit cards. Loans can be fairly straightforward, but credit cards can often be a little more complicated in terms of how it works, and how to use them properly. Credit cards can be a versatile tool that empowers individuals to manage their expenses, handle emergencies, and build their credit history.Smiling woman laying on a carpet, holding a RCS credit card, busy on her laptop.In South Africa, just like in many other parts of the world, credit cards have become integral to our daily lives, offering convenience and flexibility. In this article we look to demystify the concept of credit cards, explaining how they work, the nuances of interest rates, and providing valuable tips on how to use them wisely.

How Do Credit Cards Work?

At its core, a credit card is a financial instrument that allows you to borrow money from a financial institution, up to a predetermined limit. This borrowed money can be used for various purchases, both online and offline. Unlike debit cards, where transactions are deducted directly from your bank account, credit cards offer a line of credit that you need to repay later - often in smaller, more manageable instalments. 

Understanding Interest Rates

When you use a credit card and do not pay the full amount by the due date, you incur an interest charge on the remaining balance. This interest rate is expressed as an Annual Percentage Rate (APR). In South Africa, APRs can vary, and it's crucial to understand the terms and conditions of your credit card agreement to comprehend how interest is calculated. Usually, interest charges are added to your outstanding balance each month, making it essential to pay, at least, the minimum due amount to avoid falling into a cycle of debt.

Making Smart Use of Credit Cards

  1. Paying on Time: The golden rule of credit card usage is to pay your bill on time. Missing payments not only incur late fees but also negatively impact your credit score, making it harder to obtain credit in the future.
  2. Managing Credit Utilisation: It's advisable not to use your credit card up to its maximum limit. Ideally, keep your credit utilisation below 30% of your total credit limit. For instance, if your credit limit is R10 000, try to keep your outstanding balance below R3 000.
  3. Budgeting: Treat your credit card as an extension of your budget, not as extra income. Only charge what you can afford to pay back when the bill arrives. Credit should always be a last resort but can be a very useful tool in the right situations
  4. Regularly Review Statements: Keeping an eye on your monthly credit card statements is essential. It helps you track your spending, identify any unauthorised transactions, and rectify errors promptly.

Credit Card vs. Store Card: Understanding the Difference

While both credit cards and store cards allow you to make purchases on credit, there are significant differences between the two:

  1. Acceptance: Credit cards are widely accepted, not just in specific stores but across a broad spectrum of merchants, both online and instore. Store cards, on the other hand, are limited to specific retailers or retail chains.
  2. Interest Rates: Store cards often come with higher interest rates compared to regular credit cards. This means that if you carry a balance on a store card, you'll end up paying more in interest charges.
  3. Rewards and Benefits: Credit cards sometimes offer reward programs, cashback incentives, and various benefits like travel insurance or purchase protection – and these rewards can be quite varied. Store cards will generally be limited to store-specific rewards, making them less versatile in terms of benefits.

Get Both at RCS

At RCS, you have the benefit of considering both credit cards and store cards. RCS credit cards offer up to 55 days interest-free shopping, while affordable instalments of up to 36 months are also offered. You can get peace of mind when it comes to credit from RCS thanks to built-in customer protection insurance.

Credit cards are powerful financial tools that come with great responsibility. Understanding how credit cards work, the implications of interest rates, and the distinction between credit cards and store cards can empower individuals to make informed financial decisions. By applying for a credit card online through RCS, and following the tips outlined here, you can navigate the world of credit with confidence.