It has taken me a long time to compose and upload this post because it puts my moral authority in having a personal finance blog to question. Then I figured we all have our vices and mistakes we make and need to correct, this is one of those for me.

Mine is a credit card.

According to Wikipedia, a credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder’s promise to pay for these goods and services.

In 2008 when Barclays Bank was peddling credit cards around the city, I got one for emergency use, and I would be clearing the bill before a month is over, incurring zero interest expenses, my rationale being that it was for emergency use only, and I would be clearing the bill before the month is over, thereby incurring zero interest expenses. Well, looking at the credit card bill over the months, I didn’t keep either of the promises. Some of the expenses I have paid for by card include:

Fuel
Groceries shopping
Home theatre
Coffee and meals
Hospital expenses
Books and beauty products from Amazon.com
3 years later, I have incurred significant amounts of money in credit card interest and I can say I’ve learnt a few lessons about credit card use that I can share on here. Before you get that credit card, consider the following:

1. Define Emergencies: Ideally, one should have an emergency fund that they can tap into should they need cash at short notice, but this doesn’t always happen. When you decide to get a credit card, sit and carefully define what constitutes an emergency. An emergency expense is a financial need that cannot hold off till the next scheduled cash inflow in this case the end of the month. Looking at my list of expenses above, the only thing that counts as a real emergency is hospital expenses, anything else could have waited. One could argue fuel is an emergency, but thinking about it, there’s no harm in using public transport till you can afford to fuel your car on cash.

2. Delayed Gratification: One of the disadvantages of owning a credit card is it slowly robs you of the delayed gratification virtue. You tend to buy things ‘because you can’ and under the assumption that you will ‘pay for them anyway at the end of the month’, only for the bills to add up.

For example: My DVD player was malfunctioning and I needed a replacement. So I went to the supermarket with enough money for a DVD player (Kshs 7,000), but noticed some reasonably priced Home Theatres for double the price. Needless to say, I swiped my card for the whole amount and didn’t even deposit the cash I had in hand into my credit card account, I didn’t take time to consider if I’d have enough money to pay for it at the end of the month. Chances are, had I waited till the end of the month, I wouldn’t have spent that much on an entertainment device, because hard cash hurts more than a card.

3. Interest Expenses: Most cards charge an interest rate of 3.5% per month. It doesn’t seem like much, but annually that comes to a whopping 42%. You’re better off getting a bank loan at 16% or a Sacco loan at 12%. In cash terms it’s also significant: Consider a Kshs 30,000 credit card balance for a year. You end up paying Kshs 12,600 in interest fees, almost half of the amount payable. Is the purchase you made worth that much in interest fees? I don’t think so.

4. Online Purchases: This is the reason why most people get credit cards. Several things to consider before applying for one:

- Can you use a debit card instead? Most websites now accept VISA debit cards and the advantage here is you spend cash that’s in your account so there are less chances of impulse buying.

- If it’s a book or electronic item, can you send for it in cash. Some stores e.g Bookpoint will order a book for you if you request them. Often it will land at a price that is cheaper than buying it online.

- If the item were available here, would you still buy it? Sometimes we buy things online not because we need them, but because it’s ‘cool’ to do so.

Do you have a credit card? If you do, what motivated you to do it and have you been using it prudently? What would you consider as emergency expenses?

Do you think a credit card is just a class item, mostly bandied around for prestige?