Scratch around for your wallet. Got it? Now open it up and all pull out all your credit cards.

So, how do you measure up when it comes to credit card debt?  Try answering the following questions without looking at your credit card statement:

• How much do you owe on each one of them right now?
• What sort of interest rate is your bank charging you?
• What’s the minimum monthly repayment you must make on each of them?
• Are you repaying more than the minimum monthly repayment?
• Any idea of what you should be paying if you wanted to get rid of this debt in under a year?

Now pull out a pair of scissors and pick up your credit cards…hang on, we’re kidding. What we meant was; pull out your credit card statements and see how many answers you got right.

Is there anything good about having a credit card?

No interest is charged as long as the full amount owed is paid back every month. Depending on the bank you’re with, you get a certain number of days credit (FNB offers 55 days) without having to pay interest. During this time, you can leave the amount, that’s needed to repay the credit card, in another account earning interest.

You don’t have to come up with cash up front. Take a rental car for example – without the credit card, you’d need to make a cash deposit when picking the car up. This is then refunded when you return the car. With a credit card, all they need is a copy of your credit card which they can charge later if need be.

It has a budget facility. You can make a medium-term (6 months – 60 months) loan against your credit card for large purchases. No need to arrange special finance, all you do is swipe your credit card. The repayment on this is then added to your minimum monthly repayment amount. Basically, it’s a loan within a loan.

But here is the bad news when it comes to credit cards

Service fees. Your bank is allowed to charge a maximum amount of R50 every month as a service fee for the credit card. We’ve also noticed that they charge a credit facility service fee on top of that. This amount gets added to your outstanding balance every month. Even with a zero balance, this amount needs to be paid.

Credit card fraud. Be careful when:

• Letting your credit card go out of your sight at restaurants, for instance
• Buying online from potentially unsafe websites
• Making purchases over the phone

Paying only the minimum monthly repayment. The minimum monthly repayment is only a small proportion of the total amount spent – anywhere between 3% and 5%. Don’t get lured into thinking that you can overspend since the repayments are so small.  Remember that interest rates are high, and the balance owed can grow quickly.

So, what happens if you only repay the minimum monthly repayment?

Take William who bought a sound system on his credit card:

• He pays R10 000 ‘straight’ on his credit card
• His intention is to repay the R10 000 within 55 days, but this doesn’t happen
• His bank charges interest at 20% per annum, and
• He only has to repay 3% of the balance owed (R10 000 plus R75 a month bank charges, of course)

Here’s the problem…

Paying R10 000 back over 10 months would equate to roughly R1 000 a month if the loan was interest-free, right?

But William only needs to meet the minimum monthly repayment of 3% which is R300 a month.

Forgetting about interest for a moment; paying off a debt of R10 000 with R300 a month would take 33 months.

But the debt is also growing at 20% a year. It would take 49 months to pay back the R10 000 owed and his bank would have made R4 718 profit from the deal. Here is the calculation:

What would William need to repay if he wanted to get rid of the debt in 365 days or less?

We reckon a good rule of thumb is to divide the outstanding balance by ten and then make that your monthly repayment target.

Here is how the situation looks when your minimum monthly repayment is 3%:

And here is how it looks with a minimum monthly repayment of 5%:

Notice how it makes absolutely no difference what your minimum monthly repayment is when it comes to paying off your debt. The time it takes to pay off your loan and the interest owed remains the same on both.

But did you see how a lower minimum monthly repayment percentage could encourage you to buy even more on credit?

The short and the sweet of this is:

• If you’re going to buy on ‘straight’ then make dead certain you can pay the full outstanding amount within the number of interest-free days offered by your bank
• If you can’t make the repayment within the time allowed, then consider buying the item on ‘budget’.
• If it’s too late for any of the above, and you’re already in a jam, divide the outstanding balance by ten, and do your best to make those repayments.

And it all goes without saying to not make further credit card debt while struggling to settle your current debt.

Tell us what steps you are taking to get rid of your credit card debt in 2019.

Our business is life, disability, critical illness and funeral cover. Can we help?

Until next time.

The Wise About Life Team