Social media is full of tips on how to maximise the interest-free period on your credit card, the problem is that credit cards in South Africa work differently from those in other countries.
This can lead to some confusion for credit card users. This is what you need to know.
South African credit card providers calculate interest at a balance level, not a transactional level. What this means is that the 55-day interest free period is not calculated per transaction.
In some countries, the credit card provider will calculate the interest-free period as 55 days from the date of transaction. In South Africa it follows the billing cycle.
The interest-free 55-day period is from the time of the start of the billing period until payment is due.
Typically, the billing period is 30 days, and a client has a further 25 days before the payment is due.
Absa has a slightly longer interest-free period of 57 days.
What this means is that, if you make a purchase on the last day of the billing cycle, you effectively only get 25 days interest free.
Then, if you do not pay in full on the payment date, interest will be charged.
As Tumelo Ramugondo, the head of credit card at Standard Bank explains, the bank calculates interest daily on the outstanding balance you accumulate during the billing cycle.
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If you pay your credit card in full on due date, then the bank does not post that interest to your statement.
If, however, you only make a partial payment, then the bank will post all the interest that had accumulated on the outstanding balance. Therefore, you will lose all interest-free benefits.
For example, you made four purchases during the month with a total of R5 000 spent. You owe R5 000 but, on due date, you only pay R1 000.
A common misconception is that the R1 000 you paid would offset the interest on the first R1 000 item you bought on your card during the billing cycle.
As the South African credit provider does not work on a transactional level, this does not happen. The full interest, calculated daily on the outstanding balance, will be added to your credit card statement.
Ramugondo says there are two types of customers: transactors and revolvers.
Transactors pay their credit card in full each month and do not incur interest charges. Revolvers only make a partial payment, and they pay full interest on the outstanding balance each month.
HOW THE BILLING WORKSFOR A NEW CUSTOMER
On day one of the billing cycle, you make a R1 000 purchase. Your outstanding balance is now R1 000 and daily interest is calculated on that outstanding balance, although it is not posted to your account.
On day eight, you make another purchase for R2 000. Your outstanding balance is now R3 000 and daily interest is calculated on R3 000.
On day 20, you spend R1 000 and daily interest is now calculated on the outstanding balance of R4 000.
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On day 30, just before the billing cycle ends, you spend a further R1 000, bringing the outstanding balance to R5 000.
You receive a statement and are required to pay in full 25 days later (or 27 days in the case of an Absa card holder).
The daily interest is still being calculated on the R5 000 outstanding balance, but, if you settle in full, the interest is not charged.
If you do not pay in full and, for example, you make a repayment of R1 000, your outstanding balance reduces to R4 000, but the interest continues to accumulate.
During the following billing period you spend a further R6 000 and your outstanding balance is now R10 000 (R4 000 + R6 000) with daily interest being calculated.
Here the banks do differ. For example, if your credit card is with FNB and Absa, because you did not settle your previous balance in full, all transactions in the second billing cycle will attract interest from the day of transaction, as this increases the outstanding balance.
That means the statement in month two will reflect the outstanding balance of R10 000 plus all interest accumulated in both months one and two.
Only once you pay the account in full will you qualify the following month for an interest-free period. You would then again have to settle the balance in full.
Standard Bank does provide leeway in the first month.
A Standard Bank statement in the second month would reflect the outstanding balance of R10 000, plus the interest accumulated on the outstanding balance of the second month.
This means the interest on the R5 000 which accumulated in the first month will not be charged.
If you continue to only make partial payments, then you will be considered a revolver client and interest accrued will be posted on your statement each month.
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There is effectively no longer an interest-free period.
If you do, however, now pay the outstanding balance in full, in your next billing cycle, the interest will not be posted.
There are no smart hacks when it comes to a South African credit card except to pay in full each month.
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