How Credit Cards Work: What The Credit in ‘Credit Card’ Really Means

In May 2023, I got a credit card for the first time, issued by Standard Chartered Bank (SCB), Nigeria. Initially, I got it for the $1,000 spending limit on the card but with the unification of exchange rates, that benefit is long gone now. Since then, I’ve been trying to figure out how I can use the additional credit to my advantage.

For most people that live outside Africa, credit cards are probably a part of your everyday life and you must have gotten emails or letters from your bank offering you one once you turned 18. In Nigeria, and in most of sub-Saharan Africa, credit cards are not commonplace. Consumer Credit is typically accessed through a Fintech Application and received in a bank account. Many financial institutions do not offer credit cards as a mass-market product because there isn’t a strong system of consequences for defaulters. While failing to repay your credit card balance might show up on your record with a credit bureau (financial organizations are mandated by the Central Bank to share their monthly loan books with credit bureaus), it doesn’t prevent you from accessing a loan from another organization. In my experience, it’s fairly normal for Fintechs to lend to customers who have bad loans elsewhere.

Credit cards aren’t commonplace for a number of reasons, particularly consumer education. Even though I work in banking and have a fair understanding of lending, credit cards were something I didn’t understand till I got one and started to use it. The Banks themselves do a poor job of educating the users who are getting the cards. In this article, I’ll attempt to explain in simple terms exactly how credit cards work using examples from the one I currently use.

Getting a Credit Card

The ease with which you get a credit card is dependent on where you live in the world. In the US, UK, or Canada, Banks are falling over themselves to offer credit cards to their customers.

In Nigeria, credit cards are primarily marketed to HNIs only. Different banks also have other policies and conditions customers must meet in order to access a credit card.

From my research, SCB (Standard Chartered Bank) apart from HNIs, SCB offers two types of credit cards; salary-backed and cash-backed.

Salary-backed: SCB will only offer credit cards to employees working at companies that they(SCB) have Onboarded to their bank. The employees of these companies must also receive their salaries in bank accounts domiciled with SCB for them to be considered.

Cash-backed: SCB will require you to deposit around N425k — N850k ($500–$1000) into Fixed deposit savings account for a minimum duration of 1 year. Your deposit will continue to earn interest as it would if you kept it in that plan for a period of one year.

To access the SCB credit card, you’ll need to open a SCB account via their mobile app. You can then contact the Bank to request a Cash-backed credit card —which is the route most people would go through. You’ll need to fill a form that asks questions about your income, where you live, where you work etc

How it works

Once you submit an application for a credit card, the bank will do credit checks on you. The underwriting and processing of your application takes around 2–3 weeks. Once your application is approved, the bank will send you an offer letter with the terms for the credit. I’ll explain what each of these terms mean and how they work based on the offer I received from SCB.

Credit Limit

With N850k saved in a Fixed deposit plan, you’ll have a credit limit of N750k — ~90% of your savings. This is how much you can access on the card. Every time you spend from the card, it reduces your limit, and every time you top up your balance, your limit increases.

For example, with a N750k limit, if you spend N20k on Day 1 and N30k on Day 2, your balance will remain N700k. If you repaid the N30k you spent on Day 2, your balance will be N730k.

Essentially, you’ll never have more than N750k to spend at any one time.

SCB allows you to fix a minimum of 400k to access their Cash-backed credit cards.

Interest Rate Per Annum

Purchase: 36% per annum.

Cash Advance: 48% per annum

Purchase refers to using your cards on channels like POS and Web. Basically, any other medium that isn’t an ATM. Banks prefer when you use your card on a POS terminal or Web portal because they make money when you do so through interchange fees — these are fees/commissions shared between the card issuer(your bank), the card processor/payment gateway(the company processing the card payment —think Interswitch/etranzact) and the card network (E.g mastercard/visa).

Banks make money when you use your card. This is partly why your card issuing bank can afford to give you a credit card with interest-free days.

Cash Advance — You’re charged more for taking out cash because cash is expensive. Banks spends money on getting cash from the Central Bank or other sources and on paying staff to load their ATMs —thus making cash a more expensive medium. This is why using your card to access cash via an ATM is more expensive.

Now, the interest rates quoted above only apply if you do not make a payment within your interest-free period. For example, if you spent N100k and do not repay it within the period stipulated on your offer letter, you’d need to repay it at an interest rate of (36%/12 months =3% per month for Purchase and 4% pm for Cash). In this example, you’d be paying back N11,333k per month for the next 12 months ((N100k x 1.36)/12 months).

In reality, the interest rate will be computed on a daily basis so that for each day you do not repay, the system will show you the balance — interest + principal you need to repay.

IMPORTANT The interest charged here will be from the day the money was spent/taken out as cash till the day it’s fully repaid. You may assume your interest will start to accrue after the interest-free period BUT that’s not how it works. It’ll start to accrue from the day you accessed/used the funds.

Balance

When you receive your credit card statement on the 10th of the month, you’ll see a column that says Balance. This is the amount due at the end of a billing cycle. It’s important to clarify that this isn’t necessarily the total amount you owe on your card — but the amount that must be paid in full to clear your balance at the end of that cycle.

Joining Fee — N1, 075 + VAT

A bank isn’t a bank if they don’t find a way to charge you some fee for a service they’re offering. That’s exactly what a joining fee is. You can give it any definition you want but it’s what the bank charges you for issuing you a credit card. SCB charged me N1,075 + VAT.

Card maintenance fee — N200

Again, another fee that banks charge because banks must make money. Banks make money in two buckets —interest income and non-interest income. Interest income is made from charging interest on the loans they give (including those accessed via credit cards). Non-interest income is made from fees charged for other services. The card maintenance fee falls under the non-interest income bucket.

Tenor — 48 months

The credit card is valid for 48 months from the month of issue. In other words, you’ll notice that the expiry date on your card is 48 months from when it was issued. Your credit card offer is valid for this period of time.

Annual Percentage Rate (APR)— 45.77% pa

The APR is what you should expect to pay on average if you carry a balance and have to pay interest on your credit card use. It captures the interest rate + fees the bank will charge you on a yearly basis. It’s different from the interest rate which only carries the amount of interest and doesn’t cover any fees. While the interest rate/APR is annualized, you’re charged on your daily balance (money you owe). For example, if you miss your payment due date (the last day for you to make your payment in your billing cycle), you will be charged interest +fees for everyday since the day you spent the money. The Daily interest rate would be 45.77%/360days.

Minimum Amount Due

The MAD at SCB is a minimum of N5,000. The MAD is the minimum payment you can make for the bank not to consider you in default (i.e an owing customer). If for some reason, on the day of your repayment (usually on or before the 25th of the month) you’re unable to repay your balance, you can pay the minimum amount due which is usually 5k to remain in good standing with the bank. This means even though you’ll pay the interest on the money you have spent, you’ll not be charged late fees.

The MAD is calculated as

1% of the total amount spent + 100% fees + 100% charges (subject to minimum payment requirements of N5,000).

If the total of the above is less than 5k, SCB will require you to pay at least 5k for them to reduce it.

To remain in good standing with the bank and credit bureau, always make sure you pay at least the MAD on or before the 25th of the month.

How to maximize your monthly income with Credit Cards

You’re able to use your credit card as an additional source of income on a monthly basis. Let me paint a scenario. Assuming you earn N400k as salary in the month of August that’s paid on the 25th of August and you also have a N400k credit line on your card;

Potential spend breakdown with a Credit Card

Potential spend breakdown with a Credit Card

1. Between August 25th —September 15th, you spend N300k from your salary to offset your bills and other expenses. Before these expenses, you have put N100k in a savings plan on Moni.
2. From September 15th, you have run out of money but still need some money go manage your day to day expenses till your next pay day (September 25).
3. Between September 15 — 24, you spend an additional N70k by using your card online and on POS terminals in stores. This brings your spend between August 25th —September 24 to N470k I.e 70k more than your income.
4. On September 25th, you get paid your monthly salary of N400k and you go ahead to save your usual N100k while budgeting your N300k expenses as you’d usually do.
5. Remember, you still owe the bank N70k BUT, you do not have to pay it back just yet. You have an interest-free period of 50 days (Update: SCB has reduced this to 45 days).
6. Assuming your salary runs out again on October 15, you can go ahead to spend from your credit card from October 15 — 25. Let’s assume you spend N80k within this period.
7. Now, we owe the bank N150k. N70K between September 15–25 and 80k between October 15-25.
8. The SCB billing cycle is from the 10th of this month till the 25th of the next month which is around 45 days. Your card statement is sent on the 10th of every month and captures all your spending from the 25th of the previous month till the 10th of the current month. Let’s break that down with an example below.
9. Assuming today is October 10, SCB will send you your statement containing all your spending from September 10 —October 10. In our example above, we spent N70k between September 15–24 which falls between the September 10 —October 10 cycle.
10. Now, this 70k we have spent will be due for repayment on October 25th at no interest. In other words, we have a 45-day interest-free period; September 10 —October 10(30 days). October 10 —October 25 (15 days).
11. This means when you get your salary on October 25, even though you owe the bank N150k (from 7), you only need to pay 70k on October 25. This means you’d only have 230k cash to spend till your next salary — but technically you have more because you can continue to utilise the credit you have on your card by accessing the 70k you have repaid all over again and continuing the cycle.
12. From above, you can see that the 80k you owe will then be due at the next cycle or November 25th
13. In 11 above, after repaying the 70k in October, you can access that same N70k back on the card. This means between October and November, you would have spent 480k; 230k (Salary) + 100k (savings from salary) + 70k (CC spending between Nov 15-24) and 80k (CC spending due on November 25th).

On the SCB app, you can always see what the balance you need to repay is at any given time. Using credit cards is an easy way to maximize your income if used responsibly.

Also, note that you can choose to clear your balance (the money you owe) at any time but must be on or before the 25th to avoid late fees.

How Banks Make money from Credit Cards

Interest income: The obvious way banks make money is by charging you interest when you fail to make a full payment on your balance due (money you have used). Banks do not really want you to make a full payment on your balance due during your interest-free days but at the same time, they do not want you to default on your payment and need you to continue making regular payments for their books to look good. It’s a delicate balance.

Card fees: For SCB in Nigeria specifically, you’re charged a card maintenance fee of N200 annually or N50 per quarter. You’re also charged a joining fee of N1,075. These fees seem negligible in the grand scheme of things but that’s how imagine issuing these cards at scale.

Interchange fees: Each time you use your card on a POS, the merchant is charged a fee for the transaction by the card processor (e.g Interswitch, etranzact, paystack etc). The charges are shared between the card processor, the card scheme (e.g Visa/mastercard) and the card issuer (e.g a commercial bank).

Rewards: Banks may enter into agreements with popular merchants to direct their (bank) customers to the stores of these merchants. For example, Standard Chartered Bank may enter into an agreement with LG electronics in Nigeria to give SCB 5% off any item SCB customers buy at an LG store. SCB may then go to their customers promising a 3% discount on purchases using the SCB credit card. This way, each time a customer of SCB makes a purchase at an LG store, SCB takes a 2% cut from the 5% they had originally agreed with LG. This is a win-win for all parties involved.

Perks of a Credit Card

I now use my CC as my primary payment method for Web and POS transactions because of the rewards I get. For every transaction, I rack up points that I can use towards buying flight tickets, spa experiences, dining out etc — it’s not a lot but it’s something.

The SCB Card also offers cash back on some of my transactions. In my last billing statement, I got a cash back of N750 — I figure that the cashback I get is able to cover my card fees (joining fee, card maintenance fee etc) meaning that the card costs me nothing.