What is a Credit Card?
With a credit card, you have a pool of funds that you can tap into and pay back as needed. As the cost of living continues to soar, South Africans are increasingly relying on credit cards to get by with daily life.
Periodicals from TransUnion, a credit industry observer, show a remarkable jump in credit card uptake among South Africans in recent times.
The trend occurs across the board, from entrepreneurs managing business expenses to students in communities like Stellenbosch and Braamfontein. Even affluent professionals in use credit cards often to earn premium perks and travel rewards.
How Does a Credit Card Work?
A credit card provides a limited line of credit for you to draw down intermittently. Each month, you’ll receive a statement listing all transactions on your card, along with the minimum amount you need to pay. You can choose to repay either once or in installments and continue to borrow so long as you don't exceed your limit.
Key Differences Between Credit Cards and Debit Cards
Credit cards and debit cards look the same – small rectangular plastic cards that easily slide into your pocket or wallet. But that’s where the similarities end. While a debit card provides access to funds in your bank account, a credit card lets you borrow money on the go.
Types of Credit Cards Available in South Africa
Different credit card types are designed for specific needs. The most popular types in South Africa include:
Standard credit cards: This offers a basic line of credit with set interest rates ideal for everyday use.
Rewards and cashback credit cards: Get more from your spending by using rewards and cashback credit cards to earn points or cashback. Oftentimes the trade-off is higher interest rates and fees.
Premium and travel credit cards: For frequent travelers or high-spending individuals, premium and travel cards offer exclusive benefits like airport lounge access, travel insurance, and higher credit limits. However, these cards can have high annual fees and strict income requirements.
Student and youth credit cards: Designed for young adults and students, youth credit cards are ideal for those looking to build credit early in life. Lenders are lenient with their credit card application and approval processes. But they set low borrowing limits intentionally to prevent overspending and encourage responsible credit management.
Benefits of Using a Credit Card Responsibly
When used wisely, a credit card is a convenient tool for meeting up with everyday expenses. But credit cards can do more.
Increase your purchasing power: Get immediate access to money that isn’t in your bank account. When facing a cash crunch, a credit card gives you backup to cover your essential expenses.
Build your credit score: Consistent on-time payments steadily improve your credit score. A higher score opens the door to better credit opportunities.
Earn rewards and cashback: Many credit cards offer rewards points or cashback on everyday purchases, from travel miles to cashback for your expenses.
Grace periods: Credit cards typically offer grace periods with interest-free withdrawals. With this, you can make purchases and pay for them later—interest-free.
Understanding Credit Card Interest Rates and Fees
It’s easy to get carried away by the flexibility and rewards of credit cards. To avoid getting caught off-guard, it's crucial to understand the costs associated with the use of credit cards.
Fees
Annual Fees, service fees, and foreign transaction fees: Many credit cards have annual fees—essentially the cost of holding the card. Premium cards offering rewards like lounge access or cashback often have higher annual fees. Service fees such as charges for late payments or exceeding your credit limit can also pop up. If you travel or make purchases overseas, you’ll likely encounter foreign transaction fees, which typically range from 1% to 3% of the transaction.
Interest Rates
Most credit cards in South Africa tend to offer variable rates. A fixed rate remains the same throughout the repayment period, while a variable rate can fluctuate depending on market conditions like that Central Bank interest rate.
Penalties
Penalties occur when you miss payments, exceed your credit limit, or default on your balance. This can leave you with steep late fees or even an increase in your interest rate.
To minimize these fees, always pay your bill on time.
Automate your payments if you can.
Stay within your credit limit and pay off balances in full when possible.
Eligibility Criteria for Credit Cards in South Africa
Wondering how to get a credit card? Lenders will assess your ability to repay your credit based on a common set of criteria. That includes:
Minimum income requirements: This varies depending on the type of card. Standard credit cards usually start at around R3,000 to R5,000 minimum income, while premium cards have much higher minimum thresholds.
Credit score considerations: Your credit score plays a key role in determining your eligibility and the lender’s terms for your credit card. A higher credit score improves your chances of approval and attracts better interest rates. Conversely, a poor score might limit your options or result in a higher credit card interest rate.
Documentation needed for application
When applying for a credit card, you’ll need to provide:
Proof of identity (an ID or passport)
Proof of residence (a utility bill or rent agreement)
Proof of income (recent payslips or a bank statement, or tax returns if you’re self-employed
Options for Applicants Without a Fixed Salary or Payslip
If you’re a freelancer, student, or informal worker and don’t have a fixed salary, you can still secure a loan offer. Some lenders accept any proof of income, such as a bank statement. You can also apply for youth or student credit cards that have lower income requirements. Some banks even offer “secured” credit cards, where you put down a deposit to guarantee the credit line.
Credit Card Risks and How to Mitigate Them
Credit cards can be a double-edged sword. The following tips can help you manage credit cards responsibly.
Common Mistakes That Lead to Debt Accumulation
A common mistake is paying only the minimum amount due each month. While this keeps you in good standing with the lender, it leaves your interest piling up.
Another mistake is using a credit card as an extension of your income. When you start relying on credit for everyday purchases, you can quickly lose track of how much you're spending. Always aim to pay off your balance in full each month and set a personal spending limit — below your actual credit limit.
Identifying and Avoiding Credit Card Fraud
Fraud is another significant risk that comes with using credit cards – online theft, card skimming, etc. One common sign of fraud is unexpected or unfamiliar charges on your account.
To avoid credit card fraud, always keep your card information secure. Be cautious when using your credit card online. Use trusted websites, avoid public Wi-Fi when making transactions.
Regularly monitoring your statements and setting up real-time transaction alerts can help you catch early signs of fraud. If you suspect anything, contact your bank immediately.
Building and Improving Your Credit Score With a Credit Card
A credit card that’s used responsibly can help in building and improving your credit score. Here are tips to help you use credit cards to boost your score.
Make payments on time, every time – even a single missed payment can negatively affect your score.
Keep your credit utilization low – Ideally, aim never to use more than 30% of your credit limit.
Avoid applying for multiple credit cards in a short time – this can result in multiple hard inquiries on your credit report, which may lower your score temporarily.
Build a long history of credit use – the longer you’ve had an account open and in good standing, the better your chances of working with potential lenders.
Review your credit report regularly – mistakes and inaccuracies can drag down your score.
Alternatives to Credit Cards
While credit cards offer flexibility and rewards, they’re not ideal for every situation where you need to borrow money. Other alternatives to explore include:
Personal loans: If you need to finance a larger expense, like home renovations or debt consolidation, personal loans give you a lump sum of money upfront, which you repay in fixed monthly installments over a set period, typically with a lower interest rate than credit cards.
Overdraft: An overdraft allows you to overdraw your bank account up to an agreed limit. The difference between overdraft vs credit card is that an overdraft is tied directly to your checking account, and interest rates can be lower than credit cards.
Long-term loans: Long-term loans, such as mortgages or car loans, are designed for significant, long-term investments. These loans typically offer lower interest rates and longer repayment periods compared to credit cards.
Frequently Asked Questions About Credit Cards
Can I get a credit card with no credit history?
Yes, many banks offer entry-level or secured credit cards for individuals with no credit history. You’ll likely have to settle for lower credit limits and fewer perks, but it’s a great way to start building your credit score.
What should I do if my credit card is stolen or lost?
If your credit card is stolen or lost, contact your bank or card provider immediately. Most banks have a 24-hour helpline for such emergencies. They will block your card to prevent unauthorized transactions and issue a replacement card. Additionally, regularly monitor your account for any suspicious activity and report it as soon as possible.
What’s the difference between a secured and unsecured credit card?
A secured credit card requires a cash deposit as collateral, which typically matches your credit limit. It’s an excellent option for those with bad credit or no credit history. On the other hand, an unsecured credit card doesn’t require a deposit and is more common for individuals with a good credit score.
The right credit card can be a boon to your financial well-being. Picking the right card requires understanding your spending habits and financial goals. Are you looking to build your credit score, earn cashback, or create a safety net for emergencies?
Also, having the right card is only half the battle. You need to use it responsibly. Always pay off your balance in full each month to avoid interest charges. Keep your credit utilization low—ideally below 30%. Regularly review your statements for any unfamiliar charges to protect yourself from fraud.
It’s also important to shop around and compare card options, the same applies also when looking to get a loan. FairBanker gives you a head start in that regard. FairBanker works with certified lenders to bring you the best pre-approved loan offers in South Africa.