I have been a credit card user for the last decade or so and I have enjoyed every bit of the convenience, security, rewards & benefits that come with it. In my opinion, it is the best way to pay. During the course of this article, I will highlight some of the key advantages of using a credit card vs. any other form of payment.
To begin with, what is the difference between a credit card and a debit card?
- A credit card is a card that allows you to borrow funds from card Issuers (usually banks) to pay for products and services.
- A debit card works almost like a credit card with the difference being that a debit card draws money directly from your bank account whenever you make the purchase using it.
How does a credit card work?
Many people do not understand how a credit card works. Even some of the credit card holders don’t understand how their own credit card works. To try and make this simple for both credit card holders and those planning to acquire one, I sought the opinion of an expert in this field and I found out simple, but interesting facts that many people are not aware of and I want to break it down in very simple terms.
Look at this scenario:
You have gone to an Issuer, applied and given a credit card with say 200,000 shillings as credit limit, (Note that this is not your money. The money is coming from the Issuer to your card and you are expected to pay back after spending). You have the credit card and you go and use it on day 1. The Issuer typically gives you a 30 day cycle period for your statement and then additional 15-20 days to make the payments for that cycle. This means that you will get up to 50 days to make payment for your transactions.
Suppose on the payment day, you make the full payment. Card Issuers will not charge you any interest when you make your payment in full within the stipulated timeframe. What this means is that you have enjoyed somebody else’s money for up to 50 days and not paid any interest, provided you made the payment in full and on time. Wow! That in itself is a great benefit to have. I wonder how other lenders will react to the fact that I can enjoy somebody else’s money and don’t have to worry about paying interest as long as I make that payment on time.
In a scenario where the payment is not made in full, interest is charged from the transaction date (from the day you owed that amount to the bank). So, if you owe the bank 200K for 20 days and then on the 21st day you make 150K payment, the interest will be charged on 200K for 20 days (which is the money you owed the bank for that period) and then the balance will be charged on 50K for the next 10 days.
That is how credit cards work around the world in general! My personal advice is to take advantage of the free credit period by making the payment in full every time. No one else will give you free credit!
What are the advantages of using a credit card?
This is where it get’s even more rewarding. Contrary to what many people think, using a credit card for me is one of the best ways to make payments for goods and services. Of course, this will only be realized once you know how to use the card.
In my opinion, a credit card is the only mode of payment that gives you worthwhile value back.
Let us compare it with other forms of payment.
M-PESA for instance – you are actually charged for a number of those transactions.
Cash payments – unless you bargain, there is no value.
With a credit card, this isn’t the case. When you make payments via a credit card, some Issuers will give you rewards for your purchases. Just imagine this; someone gives you money as a loan then rewards you for using it. This value can range anywhere from 1% to 3% of your spend. So, every time you use the card, you earn some money back.
Imagine your issuer gives you 2% value back on your spend. In a year, let’s say you spend 1M shillings on your card. That translates into 20K shilling of value back to the consumer. The more you spend, higher the value!
In addition, a lot of the issuers offer other benefits on cards such as free travel insurance, airport lounge benefit and pre-negotiated discounts and deals on dining and other shopping outlets. A value that you normally don’t get by using cash!
With the advent of Chip & PIN cards, the security is also more enhanced. Some of the issuers also provide added security tools to customers who use their cards online.
This gives me the peace of mind every time I am using my card.
In summary, a credit card is a key to unlocking a world of rewards and benefits, if you know how to make the most of it. I will encourage my fellow Kenyans to try their hands on one that gives them as much value as I get from my Barclay credit card.