Credit has costs

It seems South Africa will soon be set for cheap credit as banks go ahead with cut-price balance transfer rates in a bid to attract new credit-card customers.

It seems South Africa will soon be set for cheap credit as banks go ahead with cut-price balance transfer rates in a bid to attract new credit-card customers.

Despite the hundreds of thousand of South Africans who are already struggling with mounting debt, First National Bank and Absa Bank are fiercely competing for customers by offering deals that are not easy to decline.

Experts have cautioned all consumers, but especially those already knee deep in debt, not to see these offers as a quick fix to their debt problems.

Paul Beadle, whose company www.Justmoney.co.za runs money management online, says people who are struggling with debt repayments should not see these offers as an easy way of borrowing cash.

"If people are having financial problems already, taking out another credit card could only worsen their situation," he says.

But he says that the National Credit Act has strict guidelines on credit extension.

"Credit-checking procedures are very strict and the credit criteria are tight. I think that a lot of people applying for these deals will be declined," Beadle says.

FNB was the first to offer a low debit interest rate - what you pay on any outstanding balance - of prime minus 1percent.

It gives an effective debit-interest rate of 13,5percent to qualifying customers if they transfer the balance from their credit cards, store cards and personal loans when taking out an FNB credit card.

Now Absa has followed suit by offering a whopping 2,6percent under prime - which means a debit-interest rate of 11,9percent for qualifying customers who take out an Absa credit card and transfer their debt to it.

FNB Prime Minus 1percent is an offer for new customers who wish to transfer their other debt to the FNB card.

The low 13,5percent interest rate is for nine months and this offer closes at the end of March.

Beadle says the benefits of this card are that it's cheaper than a personal loan and it could help you to save money if you want to consolidate your debt.

If prime goes up, then so will your credit card rate - but you will also benefit if the prime rate goes down.

But watch out because once the nine-month offer period is over, you will have to pay the prevailing FNB credit card rate, which is currently about 22 percent.

Also, there are penalties if you pay off in full the amount you transferred before the nine-month period is up.

Absa Bank's offer also closes at the end of March.

Beadle says that the card can benefit those people paying off several debts and who are looking to consolidate their debt to one single monthly payment. He says that transferring their debt to one institution could save money in the long run.

But don't forget that you still have to spend at least R500 a month on your Absa card, in addition to paying off the balances that you have transferred, so Beadle advises that there is a danger that your debt will get even bigger.

Once the nine-month deal is over, you will have to pay the prevailing Absa credit card rate, which is now about 23percent.

In Your Money about two weeks ago, we cautioned consumers about fee-free and reasonable interest offers, which are being offered from companies such as Virgin Money and Nedbank. Deals are also being offered by Pick 'n Pay's Go-Banking.

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