Financial Literacy for Everyone
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Credit pros and cons

A credit card is a "buy now, pay later" tool. A credit card allows you to buy things now and pay it back later. You get a credit limit that indicates for how much you can buy.

A credit card is a wonderful product, but it is a big risk if you don't think carefully before you use it. There is always the temptation to buy something when you want it, even if you have not budgeted for it.

If you manage your credit card well, by at least paying off the minimum amount every month, it will help to build a good credit history for you.

One of the big problems with a credit card is that you could use all the available credit quickly, and then pay back only the minimum payment every month. If that happens, the amount you owe becomes large, plus you pay a high interest rate on that amount.

If you use your credit card wisely, it is one of the least expensive bank products available. The best way to use it, which does not cost you anything in terms of interest, is as follows:

  • Buy products according to your budget by using your credit card. This amount is put on your credit card account, and the bank pays the store.
  • At the end of the month the bank sends you a statement. On the statement there is a list of all the purchases you have made, and how much each purchase cost. All these purchases are added together, and the total amount owed appears at the bottom. This is the amount you owe the bank.

If you pay the full amount before the due date, you do not pay any interest. This would mean that you had FREE use of the money from the date of the purchase until the date that you pay.

BUT

If you pay after this due date, even just one day later, the bank will charge you interest on every purchase from the date you have made it.

If you pay only the minimum amount, you will still owe the bank the outstanding balance and you will pay interest on this. The longer you wait before you pay the outstanding balance, the more interest you owe. If you use a credit card in this way, it can become a very expensive buying method.

Another way to use a credit card is to put the money from your budget for expenses into the credit card at the beginning of the month. You will then have a credit balance, which means you have money in the account, and you will earn a small interest on this credit balance.

You then use your credit card for all your purchases during the month. Each purchase amount is deducted from the credit balance. If you work according to your budget, your credit balance should be enough for all your purchases and you will not owe the bank anything.

If an emergency happens that you have not budgeted for, you have credit available in your account, which you can use.

A bank will only give you a credit card if you have a good credit record. You will also have to prove that you earn money on a regular basis. This is discussed in "How to build a good credit record."

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