YOUR CREDIT CARDS ARE PLAY­ING FOR A FOOL

Finweek English Edition - - FRONT PAGE - Gregg Sned­don is a cer­tif ied f inan­cial plan­ner with The Fi­nan­cial Coach in Cape Town.

It all started when I re­ceived an SMS from my credit card provider in­form­ing me of a trans­ac­tion that had taken place, and that I still had R19 000 as my ‘avail­able bal­ance’. R19 000 sounded good, at least un­til I re­mem­bered that my to­tal credit limit is R20 000 and that I did not have R19 000 ‘avail­able’ to spend. In fact, I owed them R1 000! It is in­sid­i­ous and I am go­ing to sound like a con­spir­acy the­o­rist now, but we need to re­alise that the whole sys­tem is de­signed and struc­tured to get us to spend more and more with­out think­ing about it.

Re­search done by Dun & Brad­street shows that, on av­er­age, peo­ple will spend 12%-18%* more when swip­ing with a credit card than when pay­ing cash. And when McDon­ald’s in­tro­duced its pre­pay Arch Card, it found that the av­er­age spend went up from $4.70 to $7.00 per trans­ac­tion – that’s al­most 50%. In fact, there is a gen­eral ex­pec­ta­tion by re­tail­ers that when they in­tro­duce a credit or pre­paid card, the av­er­age spend will in­crease as a re­sult.

The rea­sons for this are nu­mer­ous and well re­searched but in short, there is lit­tle (if any) emo­tional at­tach­ment to a plas­tic (card) pur­chase. We view it as if we are spend­ing some­one else’s money and, as a re­sult, we don’t feel any ‘pain’ when swip­ing. The re­sult is that we tend to spend more than what we would when pay­ing with cash. When you use cash you usu­ally think about it twice – it means go­ing to the has­sle of draw­ing the funds and then count­ing out the ac­tual pa­per (and you can’t spend what you don’t have). The re­search shows that “the more trans­par­ent the pay­ment out­flow, the greater the aver- sion to spend­ing, or higher the ‘pain of pay­ing’. Cash is viewed as the most trans­par­ent form of pay­ment.” Cash, there­fore, dis­cour­ages spend­ing.

When we use our credit cards it is too easy to spend with­out think­ing about it. It is also eas­ier to do im­pulse and un­planned shop­ping with a credit card. Think about this: you pop past the ‘store’ on the way home to get milk and bread… you don’t have cash and you need to use your credit card; some­thing is in­grained in us that says you can’t just put this on your card, and so you get a cho­co­late and maybe a magazine or two… you’ve just spent more on stuff you had not planned to buy and prob­a­bly did not need ei­ther. Or think about the last time you went gro­cery shop­ping and paid by card – chances are you just signed and walked out, only later did you think about the amount and chances are you could not re­mem­ber it ei­ther. How­ever, if you had to draw cash and then pay a few thou­sand in notes for gro­ceries you would give it much more thought and would prob­a­bly know ex­actly what you spend. No won­der we would spend less if we used cash only.

But surely it is not safe to carry large amounts of cash? While this might be true, these days with the sig­nif icant amount of card fraud around, it is also not 100% safe to use your card ei­ther.

BUT WHAT ABOUT THE

RE­WARDS PRO­GRAMMES?

My sense is that if you can of­fer me a re­ward then the chances are that you are over-charging me upfront in some way or another. The re­wards pro­grammes are also

not nearly as re­ward­ing as we think they are. I don’t have SA stats, but in the US it is es­ti­mated that up to 75% of air-mile re­wards go un­claimed – I sus­pect this may be the case when it comes to credit card re­wards too. I know that I think dif­fer­ently about spend­ing my ‘ miles’ than I do about swip­ing my card (this is not ra­tio­nal).

And the re­wards are not that great ei­ther – the amount of money you need to spend to earn one ‘re­ward rand’ is more than we re­alise. With my credit card com­pany, I get one mile for ev­ery R12 spent. So 1 000 miles means that you spent R12 000, and with 1 000 miles you can buy goods for R100. This means I spend R12 000 to get R100 back! That’s just plain crazy (and there is the an­nual re­ward pro­gramme fee in ad­di­tion to this).

Fig ures at end-De­cem­ber 2012 showed that there are just over 20m credit ac­tive con­sumers in SA and al­most 50% of them were credit im­paired (three or more months in ar­rears with their pay­ments). The most re­cent f ig­ures re­leased this week are slightly worse. At one stage in 2012, one of the big un­se­cured lenders was ru­moured to be writ­ing over R400m worth of new loans each month. We need to wake up to the fact that we have a debt cri­sis in SA and credit card debt is part of this. We seem to have the no­tion that we can just keep on get­ting more credit and spend­ing more as a re­sult but the truth is we can’t spend your way out of debt (which is

ex­actly what the debt com­pa­nies want us to be­lieve we can do). Some­where along the line we are go­ing to pay for all the ‘credit’.

Hav­ing said all of this, I ac­cept that credit cards are not all bad but we need to recog­nise that they are de­signed to get us to spend more than we would. On top of this, most of us also end up pay­ing in­ter­est on this big­ger amount.

IF YOU WANT TO USE A CREDIT

CARD THEN YOU SHOULD CON­SIDER THE FOL­LOW­ING:

• Plan your spend­ing – you will spend

more on a card than if you paid cash – be aware of this and don’t im­pulse shop! I re­cently came across a great quote that said a bud­get is peo­ple telling their money where to go in­stead of won­der­ing where it went. Credit cards of­ten leave us won­der­ing about where the money went. • Never draw cash from your credit card

– you pay in­ter­est straight away.

• Al­ways pay your bal­ance in full on or

be­fore due date to avoid pay­ing in­ter­est.

• A debit card is prob­a­bly bet­ter than a credit card in many ways, and of­fers sim­i­lar ben­e­fits to a credit card but with­out the in­ter­est penal­ties.

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