How to avoid falling into credit card trap

By Jackson Okoth

The idea of using a credit card to make purchases at a retail store or having a meal at an exclusive restaurant is both appealing and trendy to many these days. This is especially so for the young and individuals on the move, who are mostly in their first salaried employment.

 But while a credit card can feel like an elephant in one’s pocket, it can also be a source of distress or even financial ruin. Herman Otieno is a management executive who fell for a high-energy sales pitch and took out a Visa-branded credit card with his bank. The card’s spending limit was equivalent to 50 per cent of his net salary of Sh100,000.

 Otieno used his card mainly for shopping for households as well as incidentals and other emergencies. All went on well for two months until be begun to make cash withdrawals on this card while making purchases on the balance. His card debt went up when the bank decided to reduce amounts of card debt it could recover from his account from 100 per cent to 50 per cent.

Tragic experience

 In no time, Otieno begun to pay higher interest charges on delayed card debt payments as his nightmare got worse each month. He was only able to get out of this debt trap by taking out a loan from another bank and settling it, thereafter cancelling the credit card altogether.

Otieno’s tragic card experience is an example of what many that have credit cards get into.  There are a number of pitfalls to avoid when using a credit card.  “The card in itself has no shortcoming. It is the purchasing behaviour of the user that determines whether a credit card delivers benefits or financial mess,” said Patrick Wameyo, consultant at Financial Academy & Technologies.

 A credit card provides a certain amount of money available to the owner to access for a short period of time, usually up to 50 days of credit. It is most suitable for disciplined users who will keep track of repayment date and most likely all the amount of credit used up over the previous credit period.

This breed of people is the minority. Most card users are spendthrift and do not pay attention to detail on their expenses. “I have been paying huge bills over transactions that I have lost track of. I am even suspicious that the bank could be charging me for what I have not spent,” said Ali Mohammed, senior manager at a distribution firm.

Credit period

 Financial experts warn that over time, there is a risk that the cardholder begins to treat this facility like an additional income and thereby expanding their lifestyle as though this credit is part of their ordinary income.  “This has the effect of encouraging the cardholder to get into a cycle of debt that might eventually be detrimental especially if they use up the entire limit and their income has not expanded enough to clear off the debt at the end of the credit period,” said Wameyo.

 This credit line that comes with the card is usually offered at  very expensive interest rates than personal loans. It is therefore not suitable for use to purchase consumer goods when you intend to carry forward some of the debt beyond the credit period especially when the card limit is high.

 “In this situation, subsequent income is used to pay off growing interest expense and debt. One can then re-borrow again to survive. Once the cardholder is trapped in this debt cycle, it would take an external source of refinancing such as a loan to move out of it,” Wameyo tells Shillings&Sense.