Its dead easy to get your hands on credit nowadays. If you need cash, there are literally hundreds of lenders waiting in line to write you a cheque. An important part of effectively managing your debt is to have a good understanding of the different types of credit available to you, and the implications of those credit options. In this blog post we are going to touch briefly on the types of credit available to you, but focus specifically on the credit card sitting in your wallet or purse right now.
In terms of the National Credit Act, a credit agreement can be defined as:
- A credit facility (like a credit card)
- A credit transaction (like a vehicle finance agreement)
- A credit guarantee, or
- Any combination of the above
If you have a bank account that your salary gets deposited into, you can be rest assured that your bank has tried to up-sell you on a credit card. Have you had that call from a bank representative with the great news that you’ve qualified for another R50,000 credit card? They just need 10 minutes of your time to finalize the deal and the card will be express couriered to your door in 24 hours. We’ve all had that call, right?
Credit cards can come in handy if you need access to quick “tie me over” money, without interest charges (yip, not interest levied if you make your payments on time) or want to buy something and pay it back over a period of a few months.
What does the credit card application process include?
- You submit your application to your bank.
- Once your credit card application has been assessed, you will be notified if your application has been successful or not. If successful, a line of credit will be offered to you.
- A credit limit will be set (which is based on your assessment) and your monthly repayments due each month are calculated on the balance spent and owing up to the statement date.
- You are issued with a credit card and off you go (happy spending!)
- Your minimum repayment is calculated as follows:
Your credit card purchases + the outstanding balance + interest charges / repayment period
How much can you be charged for on your credit card?
You are generally in for three types of fees if you have a credit card:
- Monthly account fee (this is capped)
- Credit facility (but some banks will waive this)
- Interest charges
The good news is that the National Credit Act has capped the interest that can be charged on credit facilities (remember that a credit card falls in this category).
The maximum amount of interest charged on a credit card is:
Repo rate + 14% per annum capped at 21%
Hold on, what is a Repo rate?
That’s a good question. Your bank needs money to loan out to you, so the Reserve Bank lends money to commercial banks at a rate called the Repo rate. You can always check out the Repo rate by visiting the Reserve Bank’s website.
At the time of writing this blog post, the Repo rate was sitting at 6,50%. That means, your bank could charge you:
6,5% + 14% = 20,50% per annum interest on your credit card.
The Pros of owning a credit card
- The application process is easy and credit cards are accepted everywhere around the world.
- You don’t need to risk carrying cash around.
- You don’t get charged interest if you meet your monthly repayment obligations. This is key because it allows you up to around 55 days of credit, without having to pay any interest. Imagine you needed R5,000 for a car service and pay-day was two weeks away. You could run the service on your credit card and on pay-day square your card off, without attracting a cent worth of interest charges.
- You can use your credit card to secure a deposit (like a holiday booking)
- You can activate a budget facility which will allows you to pay off the loan over a longer period of time (generally 12 – 36 months)
The Cons of owning a credit card
- By law you can’t get charged more than R60 a month as a “service fee” on your credit card, and if you pay your monthly repayments on time, no interest is charged. But if you don’t meet your monthly debt obligations, the interest charged is steep. If you have too many credit cards, with large outstanding balances, you will be paying a whack in interest charges.
- Credit card fraud is very high
Owning a credit card is a great way of getting your hands on quick money, with a window of around 55 days before you start paying any interest. It’s also handy if you want to purchase an item and budget for it over a longer period of time (perhaps a year or two).
The tricks to effectively managing a credit card are the following:
- Don’t have too many cards even if the bank is throwing the money at you.
- Don’t extend or accept a line of credit you know you can’t afford to repay.
- Make sure you meet your monthly repayment obligations.
- If you feel like you might default, get in touch with your bank.
- If you are in a vicious cycle of using one credit card to pay off the next, consider getting some professional debt management help.
Until next time.
The Wise About Life team