Credit cards in South Africa have a bad reputation they don’t entirely deserve. Yes, you can easily get yourself into debt you can’t easily afford with a credit card. It is also easy to get locked into a minimum payment cycle, where the money you ‘payback’ never addresses your actual balance and only offsets the interest charged. Many of these problems arise from people treating it as ‘free money’ they don’t have to think about, however, and not a problem in the product itself.
Using your credit card smartly, so you always have money when you need it and don’t pay excessive interest rates, all starts with understanding those interest rates better. Today we will look deeper into how credit card interest works, and how to make your credit card a tool that works for you, instead.
How Is Credit Card Interest Calculated in South Africa?
To take charge of your credit card as a tool, not your master, you need to understand how credit card interest is calculated in South Africa. Most financial institutions use what is called the ‘average daily balance’ method. This means your outstanding balance is worked out each day in the billing cycle. Let’s look at this in more depth:
At the end of each day, the balance on your credit card account is calculated, including any new purchases, cash advances, and outstanding balances from previous days. The credit card issuer applies an annual percentage rate (APR) to the daily balance to determine the daily interest charge. This APR is often expressed as a monthly rate for calculation purposes.
The daily interest charges accumulate throughout the billing cycle, adding to the outstanding balance each day. At the end of the billing cycle, the total interest charges accrued over the period are added to the outstanding balance. The minimum payment due is usually a percentage of the total balance, including both the principal amount and any accrued interest.
However, due to the front-loaded nature of the interest, that same monthly payment mostly pays your due fees and charges and then services the interest. Very little goes towards reducing the actual balance due. This means next month, most of your minimum payment is again eaten up by fees and interest, with no meaningful balance reductions. And so it goes, with the balance remaining high and most of your ‘payments’ addressing everything but the reduction of the balance. It’s a great money earner for the issuer, but a slippery slope that could land you in financial trouble easily.
How To Avoid Paying Interest On A Credit Card In South Africa?
If you’d like to escape this minimum payment cycle and avoid paying much, if any, interest on your credit card in South Africa, you need to learn to manage your balance smartly. Ideally, you should pay the balance in full every month. Yes, the full balance due, not the minimum payment! Those who use their credit cards in this way, paying off everything due before they reach the 30-day mark, will pay almost no interest at all. Credit cards typically only charge interest once the balance is older than 30 days and can be counted as a proper loan, not a temporary one.
What if you are already deep into your available credit? Did you know something as simple as adding another R100 to your minimum payment will make an extraordinary difference? Now, instead of being a slave to the bank’s carefully planned minimum payment, earning them maximum interest from your urge to spend, you are making a real difference in your outstanding balance.
As the balance lowers, you pay less towards interest and even more towards the actual balance. This can snowball surprisingly fast! Especially if you keep paying the same amount, and don’t lower it as the balance lowers. Most minimum payments will only pay the card off within a 5-year period. If you don’t increase and use your limit, of course, which they are hoping you will! Merely doubling your minimum payment can bring that down to 2 years or so, saving you a ton of interest paid along the way.
What Is The Average Interest Rate On A Credit Card in South Africa?
While South African banks will often advertise subprime interest rates on their credit card products, few people have the credit score and financial habits needed to qualify for that appealingly low rate. In practicality, most ‘normal’ South Africans are paying at least 20% per annum on their credit card, with the average hovering around the 22% mark, depending on the prime interest rate and changes to it.
Why are credit card interest rates so high in the first place? Credit cards are unsecured, meaning that there is no asset, like a house or a car, that can be seized to pay the loan if you don’t. So it is a risky product for the lender, and you pay higher interest to offset this.
Why Am I Getting Charged Interest When My Balance Is Zero?
It is technically impossible to be charged interest on a zero credit card balance. However, remember that the statement cycle may be slightly out of phase from the day-to-day balance. You may be paying off ‘old’ interest that didn’t quite reflect on the latest statement. Alternatively, you may have the monthly fees eating into your zero balance and generating interest. Remember, the monthly admin fees don’t go away when the balance reaches zero! You will still need to pay them every month, or your balance will slowly tick up again.
