Relationships must be built on understanding & knowing each other's limits.
By Lehlohonolo Lehana.
Valentine's Day is upon us. It's easy to have a 'love-hate' relationship with your credit card. It's great when you can shop and spend together. But, when your plastic partner leads you astray it's easy for what was once love to degenerate into a toxic relationship in which fear is the primary emotion - especially when your monthly bill arrives, says John Manyike, Head of Financial Education at Old Mutual.
Of all financial products, a credit card is the most likely to become your indispensable and trusted partner. It travels with you, is always ready to support your decisions even when they are wrong, pays its way and is also popular with your friends and incidentally some of your friends might have a secret crush on your plastic partner said Manyike.
"But like any relationship, things can go sour, especially if you have not set clear spending boundaries and if you are not a disciplined spender. You will quickly discover that this relationship has led to you overspending, blowing your budget, buying items you don't really need to impress people you don't like with money you don't have and putting you in a debt spiral. Honeymoon period over, resentment sets in."
Symptoms that point out that your relationship has gone awry are:
- Your card issuer has advised you that you have exceeded your card limit
- You can't recall what you and your plastic partner spent money on
- You know that you are going to battle to meet even the minimum required payment
- It dawns on you that with interest being added every month that you are in a debt trap and that you will find it difficult to climb out of
- You avoid calls from private numbers in case it's debt collectors or your bank.
"Breaking up permanently with your plastic partner is easy. All it requires is an iron will and a sharp pair of scissors to cut the card to pieces. You then need to call your issuer to cancel the card, and the job is done."
"You will be officially on a rebound and you can now start on the road to recovery. Naturally, part of the process will be pondering about what went so wrong, and whether you could ever start a new relationship."
"The good part is that without realising it you are already healing. Destroying and cancelling the card means that your spending can't get out of control again, and a replacement card won't be delivered. However, you will still have to pay the outstanding balance before the relationship is done for good." Don't get tempted to ask for a love-back until you develop the right financial discipline
The way to go forward is to:
- Check the balance owing and decide whether you can pay it off immediately or whether you need time to do so
- Contacting your card issuer and, while cancelling the card, getting their agreement to put a payment plan in place. From this point onwards, you can start making payments over an agreed period – this means the debt is controlled, and you can begin drawing up a new budget.
"It is far better to move first to resolve the relationship issues. Doing nothing and waiting for the issuer to red list you can have serious implications for your credit score and impact your ability to apply for loans or other lines of credit in future," added Manyike.
But, if you believe that toxicity can once again become love, it is worth revitalising the rapport with your plastic and making it the valuable companion it can be.
It is worth considering:
- Closing unnecessary accounts and diverting these payments to your card. Credit cards traditionally attract high-interest rates (up to 21%), and upping payments in this way can rapidly reduce what you owe.
- Committing yourself to paying more than the minimum required.
- If you have more than one credit card debt, consider debt consolidation.
- It may sound like you are getting into debt by creating more, but, in fact, you are left with a single debt to pay.
- The difference is that because you are settling your card debt/s with a single payment, the interest owing is calculated at that time. This means that months of payments with interest are avoided.
- Setting up a personal spending limit for your card and paying through a debit order so that the account is automatically paid each month. You then start every month free of card debt.
"Then, you and your plastic partner should agree to follow the two golden rules for a happy co-existence," said Manyike. These are that:
- You should never use your card to buy everything. Overuse leads quickly to having payment problems at the end of every month. After all, a card limit is just that; it should not be regarded as a target that has to be spent. Debt is then carried over to the next month, interest payments climb, and stress levels increase."
- Buy what you need not what you want. A credit card with a high limit is a temptation-enabler. Don't buy luxuries instead of necessities.
"The decision to break up or make up is personal. If they are to succeed, partnerships must be built on understanding and knowing each other's limits," Manyike concludes.