ANGELIQUE ARDÉ: What you don’t know about your credit card’s budget facility
Never pay only the minimum amount required by the bank
Most people are averse to using the budget facility on their credit cards because they fear incurring additional interest.
But a budget facility can be very useful when you're faced with an emergency expense you aren't able to fund. It will also cost you less than a microloan, 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.
"But it's not for consumption spending," cautions Francois Viviers, the executive head of marketing and communications at Capitec. "Food and clothing should be settled in full at month end. When you start paying for groceries over 24 months, you should be worried."
This may be why banks don't allow transactions of less than R300 on budget.
A credit card is a great "enabler" when used wisely, Viviers says. But if you use it unwisely - especially the budget facility - you will find yourself in trouble quickly.
Here's what most people don't know about using the credit card budget facility.
1. No interest-free period on budget
When you buy something on budget, interest is charged immediately, whereas when you spend on straight, most banks give you 55 or 57 days interest free. This is one of the main benefits of a credit card. But you will pay interest - anything from prime, 10.25%, to 24.25% a year - if you fail to pay the full outstanding balance after that grace period has expired. Many people fall into the trap of paying only the minimum amount required, usually a mere 5% of what's owing at the end of each billing cycle.
Tshipi Alexander, head of card in the Everyday Banking division of Absa, says you must also remember that not all credit-card transactions qualify as interest free. "If you draw cash from your credit card, use your card to buy fuel or do an internet transfer of funds out of your credit, these transactions immediately attract interest."
2. Straight or budget, the interest rate charged is the same
The same interest rate is charged for straight purchases and on your budget facility. This doesn't mean you won't pay more for goods on budget; you will pay more in interest than if you paid on straight and paid more than the minimum instalment.
For example, a single purchase of R10,000 on budget over 12 months at a 20% interest rate will cost you an instalment of R926.35 a month, and you'll end up paying the bank R1,112 interest over the 12 months.
The same purchase on straight with a 25% payment of the outstanding balance every month, will cost you R2,500 in month one, down to R228 in month 10.
You will end up paying only R711 in interest even though it will take you five years to pay off the debt in full (when you pay only a percentage of the total outstanding balance).
3. Paying straight can cost you more
If you buy a big-ticket item on straight and pay only the 5% minimum amount required from your bank, you could end up paying far more in interest than if you had used the budget facility over three, six or 12 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 pay only 5% every month at 20% interest, after 24 months, you will still have an outstanding balance of R22,931 owing to the bank.
If you kept on paying just the 5% minimum each month, it would take you 19 years and five months to pay off the capital and interest of R24,996. This shows why you should never pay only the minimum amount required by the bank.
Most banks offer budget terms of between three and 60 months. The longest term at Capitec is 48 months, Viviers says. This is a safeguard as the bank does not want its customers spending more than four years paying off goods and appliances that have a limited lifespan.
4. You can switch between budget and straight at any time
If you chose to buy something on budget and later decide you can afford to pay off the item on straight, most banks will allow you to move that transaction to straight. You can do this by calling the credit card division or using your bank's app.
There is no cost to you. Viviers says that when you choose to pay for something on budget, you choose the term at the point of sale, but this won't show you what your instalment will be.
5. You can settle what's owing on budget at any time
Using the budget facility is a bit like buying something via instalment sale with fixed monthly instalments, except with the flexibility to change the repayment period and settle early at no extra cost.