What you don’t know about your credit card’s bud­get fa­cil­ity

Never pay only the min­i­mum amount re­quired by the bank

Sunday Times - - Business Times - By AN­GELIQUE ARDÉ

When you start pay­ing for gro­ceries over 24 months, you should be wor­ried

Fran­cois Viviers

Ex­ec­u­tive head of mar­ket­ing and com­mu­ni­ca­tions at Capitec 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). 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.

Pic­ture: Jeremy Glyn/Fi­nan­cial Mail

3. Pay­ing straight can cost you more Don’t be tempted to use your bud­get fa­cil­ity for con­sump­tion goods. Rather use it for emer­gen­cies.

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