Marketing and strategy consultant
Tell me what your credit card is and I will tell you who you are.
If you are a credit cardholder, how are you using your credit card? If you are using it as a personal loan by withdrawing your line of credit, paying it back and closing your card account, you most probably aren't using your credit card properly. That's not what credit cards have been created for.
Credit cards have been created for 3 purposes: convenience, revolving credit and benefits. Convenience means that a credit card can be used to pay for goods and services instead of cash which not only makes your wallet lighter but also decreases your risk - as opposed to paying with cash, serious credit cards protect you from fraud, purchase loss and damage, as well as let you save as normally credit cards allow you accumulate points or receive discounts. Revolving credit is another convenience differentiating the card from the personal loan, hence the name - revolving credit cards. Finally, depending on the type of card you have, you receive a number of benefits, such as various insurance programmes, discounts and points, various offers, which when valued separately may quite often be worth or exceed the annual card fee.
Finally, credit cards mean prestige which in credit card world is far from an abstract concept. Not everybody can get a credit card. In order to be able to become a credit cardholder, one has to have good credit history, have a certain level of income and be able to prove it, and in case of premium credit cards also meet a certain profile. So if you received a credit card from one of the large banks, using it for cash withdrawal only is like using a latest model Mercedes for trips to grocery shop.
Give me two!
Credit crunch has been affecting countries globally, how can we talk about credit cards! Forget it. Forget credit in general, debt is bad. We have to leave to our means. And indeed, uncontrollable borrowing when you know you can't afford to pay back is not good. Which has been so effectively demonstrated by subprime lenders in the West. If you can't afford to have a credit card and don't want to stain your credit history, you will be better off closing it if your bank hasn't done it already (in times like these banks tend to close cards of the riskiest holders). Personal bankruptcy is a stain on credit history.
Many people dislike credit cards because of their complexity. Credit card terms and conditions and credit agreements are indeed not a light read. Hence many don't read them. As a result, disappointment and unpleasant surprises. Our banks, as opposed to their western counterparts, rarely think about how to help a consumer to make an informed choice and choose the best product for his or her goals. Lack of knowledge does not mean no responsibility however. To say that credit cards are evil because not all know how they work is a bit short-sighted. Fortunately, in Kazakhstan, the number of cardholders who know what credit cards are and how to use them, is growing. Knowledge and planning are the 2 characteristics that set this group apart.
Knowledge includes analysis of available credit cards, comparison of their terms and conditions, financial self education, knowing the terms and conditions of your card, awareness of latest bank's offers. Planning means knowing why you need a card, what benefits it provides you and how it can help you manage your personal finance better and/ or save.
There are many strategies of using a credit card as a budgeting and even saving tool. Each large bank offers online banking service. Monitoring expenses and planning budget online is much easier than when paying cash. You can spend on your credit card throughout a month and then repay the next month hence allowing you to allocate the previous month's salary for other goals, for example saving. We already have a credit card with a grace period of 2 months in the market (American Express), meaning you can delay repayment for up to 2 months after the transaction had been made. At such terms it's easy to plan a large purchase with the credit card in the beginning of one month and repayment in the end of the next one. If your money is sitting in the saving account and you urgently need money, instead of closing the saving account and losing interest, you can spend on the credit card and then repay with the next salary, hence not using the saving account money at all or at least gaining another 1-2 months worth of interest.
There are many options. Credit card is a smart tool if used smartly. Choose your credit card not only based on the annual fee, but rather based on the APR, length of grace period, benefits. For example, if a bank is providing discount or, even better, rewards programme on its credit cards, your card becomes a saving tool. On top of that, serious credit card issuers provide various exclusive offers and campaigns - additional opportunity to save some money. Finally, quite often it's cheaper to get a card with a set of benefits (e.g. insurance) from a serious credit card issuer, rather than purchase these benefits (same insurance) separately, in retail.
And of course what the credit cards were created for. In times like these, when banks curb their lending, the revolving credit feature on the credit cards becomes their main advantage, especially for those who already hold them, as banks try not to alter terms for existing cardholders. So if you already have a credit card or you are being offered one, closing it or refusing the offer based on general panic and anti credit mood, without understand what it gives you, is not practical. Begin with understanding what card it is, what terms it is provided on (knowledge), as well as what it gives you in terms of benefits and how it can be of value (planning). Moreover, it's exactly during the credit crunch, that the credit card can prove its value as a flexible financial tool, that is if you use it correctly.
For those who already have a card, and possibly not one, this is the perfect time to look around, study the market and think "what does my card give me?" Also, what are the new credit card products in the market and are they offering a better deal? Besides, as in the current environment only serious banks may afford to go ahead with their credit card programmes, it may make sense to think about upgrading not only your credit card, but also your bank?
Cards differ not only in terms of their conditions, benefits and issuer banks. The key product offering of the credit card, its prestige is defined by the payment network that this card was issued on.
Depending on how cardholders use their credit cards, payment networks group them into 2 large categories - transactors and revolvers. Transactors repay on time and in full and usually don't need a revolving facility as such, or only temporarily. They use credit cards for convenience, prestige or its benefits. Revolvers use credit cards mainly because of their revolving facility and repay gradually, including interest rate.
Cardholders on Visa and Mastercard networks are predominantly revolvers which can be explained by these networks' business model and mass appeal. Interesting to note is an essential difference of American Express, another payment network that entered our market not so long ago. First, as opposed to other networks, American Express specialises on credit cards, and premium credit cards in particular (hence their hefty annual fee and selectiveness when approving cardholders). Second, American Express usually nominates one issuer or a few of them (Kazkom is the nominated issuer in Kazakhstan). Finally, almost three fourths of American Express cardholders are transactors and network's business model is built around spend, rather than debt of its cardholders (American Express cardholders are reportedly spending 2-4 times more than other networks' cardholders).
To us, consumers, the more - the merrier.
So where is that bank offer for a credit card that i received not so long ago? Not following the general panic and as a financial services consumer for many years, I have to study what it is that they are offering and decide whether this credit card can help me in managing my budget effectively this year. Credit tool as a saving tool? Yes, turns out it could be true.