A credit card should also be called a convenience card, as it has a way of making purchase seamless both online and in physical stores. This small plastic card allows you to buy stuff on credit and pay later. This article is going to look into what a credit card is and how it works in Nigeria.
What Is A Credit Card
A credit card is a small plastic card that looks like our usual debit card(ATM). This card is usually issued by banks or financial institutions.
However, just like the name implies, this card can be used to get things on credit to pay back later. It’s like taking a loan, but instead of being given a particular sum of money upfront, you’re allowed to use your card till you max it’s credit limit.
In other words, when you use your card to make a purchase, you’re essentially borrowing money from the person who issued the card to you. However, at the end of every month, your statement, containing all the purchases made within the month is sent over for payment.
Now look at one amazing thing about having a card; if you make the payment in full, you won’t be charged any interest, but paying what is called a minimum fee ends up attracting interest for the remaining fee that you’re yet to pay.
Let’s briefly look at what a credit limit is.
What is a credit limit
A credit limit is the maximum amount you can borrow on a credit card. Here is a breakdown of how it works.
When you go to the bank or any financial institution to request for a credit card, the issuer checks out your creditworthiness—this includes your income to know if you have a stable monthly income. Once this eligibility phase is passed, the issuer determines your credit limit.
Therefore, when you use your card to make purchases, your available credit reduces. But when you pay back the specified amount at the end of the month, your available credit goes back up.
How Does A Credit Card Work In Nigeria
In Nigeria, credit cards have become majorly used as a convenient way to make payments. This is how this card works in Nigeria.
Apply for a credit card
You can apply for a credit card from a bank or any other financial institution. After application, the issuer uses the information provided to access your creditworthiness (this determines how eligible you are to obtain a credit card). After assessing your creditworthiness and finding you eligible, the issuer approves your card request and determines your credit limit.
Utilize your credit card
Once your card request has been approved, you can go ahead and use your card to make purchases from stores that accept those cards. Additionally, you can use this card to withdraw from ATM’s nearest to you.
Repayment of your card debt
Getting a card helps to make a lot of things easy especially when it comes to finances. However, it’s important to remember that you have to pay back the money you’re spending from your card.
Therefore, at the the end of each month, A statement detailing your purchases and the total amount to be paid is sent over. However, there is room for payment of the minimum amount but it is advisable to pay the full amount as you’ll be charged interest on the outstanding balance.
Why get a credit card
These credit cards have become very useful for individuals and businesses. However, to enjoy the benefits that comes with this card, you need to manage it responsibly. With your card, you can make purchases on credit and pay back at the end of the month. This helps you to handle unforeseen expenses that would have stressed you out.
Also, this card is used to build a credit history—this helps you get approved for loans in the future.
Benefits of having a credit card
There are so many benefits that comes with having a card. Let’s look at some of them.
Emergency fund
Emergencies happen in life and they tend to come in different ways. Having a credit card serves as a source of emergency fund for the user.
Building credit history
Building a good credit history is important especially for businesses, as a good credit history is very essential for securing loans and other financial products.
Reward programs
Not all of these cards have rewards, but for those that do, you can earn points or cash back on your purchases. You can redeem these rewards for various benefits in the future.
Tips for responsible credit card usage
Getting a card is very important but that’s not where it ends. You need to put some strict rules in place to avoid mismanaging your funds. Let’s look at some key tips that can help you manage your funds properly.
1. Set a budget
While using your card, it’s crucial to determine how much you can afford to pay back each month depending on your income. Set a strict budget that will help you spend wisely and pay your bills without feeling overwhelmed.
2. Pay your bills on time
Credit cards are more fun to use when you use it responsibly. Therefore, make sure to pay back your card bills back on time to avoid paying interest on fees. Also, you can set up automatic payments to avoid missing out on your monthly payments.
Spend wisely
Ensure that you monitor your spendings to avoid mismanaging your fees. Having a card with a credit limit of 5million is not an invitation to use it all up. Use your card when necessary and also remember you’ll have to pay back what you owe at the end of each month.
Things to consider before getting your card
1. Your financial capability
Ensure that you have a stable income that will help you meet up with monthly payments. Create a budget that can help you effectively manage your spending habit to avoid overspending.
2. Credit score
A good credit score improves your chances of getting approved for a credit card. Also, your card can help you build up a good credit history.
3. Interest rates
Before getting your card, you need to understand the annual percentage rate (APR) that will be charged when you don’t make payments in full.
4. Reward programs
There are certain perks that comes with having a card. However, you need to evaluate if the rewards align with your spending habits.
5. Security features
Go for cards with great fraud protection measures to help you keep your funds safe.
Conclusion
Credit cards have become a great way to make payments, especially those that come up as emergencies. However, it’s important to understand that being a cardholder does not mean you should be an impulsive spender.
Create a budget that helps you to manage your spending.
And more importantly, always make sure to pay your credit bills on time as this will help you build a good credit history and avoid hurting your credit score.
