Know the cost on you when you swipe your credit card
A credit card is a great "enabler" when used wisely, but if used unwisely - especially the budget facility - you can find yourself in trouble.
Francois Viviers, executive head of marketing and communications at Capitec, cautions against consumption spending.
"Food and clothing should be settled in full at month-end. When you start paying for groceries over 24 months, you should be worried," he warns.
Also, buying something on the budget facility of your credit card costs you more because you don't benefit from an interest-free period that the banks give you when you buy on straight. When you buy on budget, interest is charged to you immediately, but that doesn't mean that you can't end up paying more interest on straight.
If you buy on straight and pay only the 5% minimum instalment, you could end up paying off your debt for years on end, incurring more interest than if you had put the item on budget and paid it off over, say, 24 months.
For example, a single transaction of R50 000 on budget over 24 months at 20% interest will cost you R11 063 in interest. But if you were to put the payment on straight and pay only 5% a month at 20% interest, after two years you would still owe R22 931. Paying only 5% a month would take you 19 years and five months to pay off the capital plus interest of R24 996.
This illustrates why you should never pay only the minimum amount required on straight. Buying on budget can be useful if you don't have savings for an emergency, big-ticket purchase, like a new fridge or a new set of tyres.
It will also cost you less than a micro loan, which attracts interest at 5% a month, and possibly an unsecured loan where interest can be as high as 31.25% a year if you're a high-risk customer.
The most that you can be charged in interest on your credit card is currently 24.25% a year, and the lowest is prime of 10.25%. When you buy on budget you aren't subject to a fresh credit assessment and you won't pay an initiation fee, both of which would apply if you took out a personal loan or micro loan.
The same rate that applies on your straight facility applies on budget. And most banks allow you to switch between budget and straight at any time and at no cost.
The one snag about buying on budget is that you have to decide on the budget term - which can be anything from three to 60 months - at the point of sale, and without any idea of what the instalment will be. That's why it's very important to do your own calculations before you buy something on budget.
For example, if you were to buy a fridge for R5,000 on budget at 20% interest, and wanted to pay it off over a short term to save on interest, your instalments could range from R882.61 a month if you chose a six-month term, to R463.17 a month over 12 months or R254.48 a month over 24 months.
This would equate to you paying interest of R293.87 over six months, R463.17 over 12 months and a whopping R1,106.32 over 24 months.
But none of this information is presented to you at the point of sale. Tshipi Alexander, head of card in the Everyday Banking division at Absa, says that if the banks were to give customers this level of detail it would adversely impact the user experience and there would be push-back from customers.