Make your credit card work for you

Most people who have credit cards either aren't managing their debt or don't know how to make optimal use of a credit card.

Research by Old Mutual shows that 56% of South African credit card holders pay the minimum instalment, and only 16% pay their balance in full at month-end.

If you're paying the minimum instalment only and continually spending on your card, you're probably slipping deeper and deeper into debt.

"While there's a lot to be said about credit card benefits, the reality is this is a formal commitment to borrow money from a bank and repay it with interest within a certain period," says Neil Thompson, the head of product and customer value proposition at African Bank. Such a financial commitment needs careful consideration, he says.

If you have a credit card or you're in the market for one, make sure you know what interest and charges you're paying, the bank's billing cycle and interest-free period, as well as the minimum instalment.

Interest rate

Before you enter into a credit agreement, the deciding factor for you should be the interest rate the bank is going to charge you. The maximum interest that you can be charged on a credit card is 20.5% a year (the formula, as per regulations, is the repo rate plus 14%).

But some banks offer their best customers less than the prime rate, which is currently 10%. If you have a good credit score, you should negotiate with potential creditors for a good rate.

First National Bank is offering the lowest-risk customers 9%, says Cilliers Kriel, CEO of FNB's credit card division.

Capitec's best rate is currently 10%, says Charl Nel, the bank's head of communications.

All African Bank credit card account holders are charged interest at the maximum rate, according to Rudi Froneman, the head of card services at the bank. The bank is reviewing its proposition, he says.

Assuming you owe your bank R15,000 on your credit card, and you're being charged interest at 20.5%, if you pay 10% of the outstanding balance every month for 12 consecutive months, you will pay the bank R2,008 in interest over the year. But if you're paying interest at 10%, you'll pay the bank R943 in interest over the year. This is before fees, such as monthly admin fee, credit life insurance and other fees.

Most of the banks charge their customers a "card fee" or "credit facility fee" over and above the monthly account fee on a credit card. Capitec and African Bank do not. Capitec offers only one credit card, which attracts a monthly fee of R35, and African Bank offers a silver and gold card, both of which attract a monthly fee of R69.

"Clients should always compare the total cost of credit and not only the interest rate when selecting a credit product to ensure they don't overlook additional fees such as a credit facility fee or high monthly admin fees," says Nel.

Minimum instalment

The banks all have different minimum instalments, and it's important that you know the minimum due by your bank in case you find yourself in a position where that's all you can pay.

The minimum instalment on FNB and Capitec credit cards is 5% of the outstanding balance.

Nel says Capitec clients can, however, choose any percentage greater than 5% or a fixed rand value, which must be higher than 5%.

Froneman says some banks charge as little as 2.5% of the outstanding balance. African Bank has set its minimum instalment at 12.5%.

Although paying the minimum can be a relief when you are going through a rough patch, it is not what you want to do over a long period as it can cost you a lot.

The best way to manage your credit card is to pay off all your purchases each month at the end of the interest-free period, and thus pay no interest to your bank.

If you can't afford that, pay as much as you can above the minimum as this example provided by Capitec shows:

Assume you spend R15,000 on your credit card and you're being charged interest at the maximum of 20.5%. If you were to pay the minimum of 2.5% a month for one year without making any further purchases, you would have paid less than R1,000 of the capital outstanding over the course of a year, and would still owe the bank R14,039.

If you could pay 10% of the outstanding balance back each month, you would at the end of the year owe only R5,903.

After three years of paying back the minimum of 2.5%, you will have made payments to the bank of R12,433 including a massive R8,332 in interest. You would still owe R12,227 on your card.

But if you are paying 10%, after two years you will be owing only R2,286 and you will have made payments of R16,448 including R2,752 of interest.

Paying the minimum instalment is not advisable and should be a last resort.