Credit Cards

Basic explanation – layman’s terms for this type of debt


There are 2 types of revolving credit on your credit card. In effect 2 different credit limits.

The first limit is called a straight facility. This is the amount of credit extended on a monthly basis. This credit is interest free when certain terms and conditions are met. Usually these terms include that the full outstanding balance must be settled within 55 days and cash and fuel transactions incur interest from day of purchase or withdrawal. You should pay the full outstanding balance on this limit every month (have no balance due).

The second limit is called a budget limit. You can purchase goods on this credit line over a certain amount (normally R 300) and repay the credit over 6,12,18,24,or 36 months. Remember interest is charged on this loan from the date of purchase. Each purchase made using this facility is charged as a separate loan and will be listed on your statement as separate loans. Interest will be charged per loan and the repayments of each “loan” will be added together to make up the amount due at the end of the month. You should not have to use this facility, or at worst use it only for major purchases.

Task:

1. Take all your credit cards from your purse.
2. Get the latest statement from each of these cards.
3. Make a list of the outstanding balance on each card from the highest to the lowest.
4. Make a list again from highest to lowest of the minimum monthly payment to be made on each card.
5. Line up your credit cards in order from the least monthly payment to the highest.
6. Any amounts within a R100 range put the higher interest rated card above the lower interest rated card on the list.

E.g: Anne has 7 credit cards:


Card       Balance owing       Interest Rate          Minimum monthly payment
1               R 4500.00              17.5%                     R 275.00
2               R 3200.00              16.8%                     R 192.00
3               R 6800.00              15.5%                     R 355.00
4               R 4500.00              16.9%                     R 268.00
5               R 12500.00            17.8%                     R 721.00
6               R 8200.00              22%                        R 492.00
7               R 5750.00              23%                        R 527.00

Rearrange the list according to balance owing:

Card       Balance owing       Interest Rate          Minimum monthly payment
2                R 3200.00                16.8%                      R 192.00
4                R 4500.00                16.9%                      R 268.00
1                R 4500.00                17.5%                      R 275.00
3                R 6800.00                15.5%                      R 355.00
6                R 8200.00                22%                         R 492.00
7                R 5750.00                23%                         R 527.00
5                R 12500.00              17.8%                      R 721.00

How to pay them off:


Pay the minimum balance owing on each card.
Pay extra (as much as you can afford) into the first card on the list above.
Once the first card is paid of, begin paying the minimum amount plus the extra you were paying on the first card on the second card on the list.

Once the second card is paid off, take the minimum balance paid on both the first and second card with the extra you were paying on the first card and pay off the third card. Continue in this manner until all the cards are paid off.

E.g:

Pay minimum on all the cards then pay R 200 per month extra on card 2. When card 2 is paid off pay minimum on all cards and R 392.00 per month extra on card 4. When card 4 is paid pay minimum on each card and R660.00 extra on card 1 and so on and so forth.

As you can see the suggestion is not to pay the card with the highest interest rate first. Although this will work and is the normal suggested route of repayment recommended by most financial advisors. I have decided to use a different approach for two reasons:

Firstly: The card with the least outstanding balance will be paid off much quicker thus leaving you with extra disposable monthly income much quicker. This alleviates immediate financial stress that, if you are reading this you most likely have.

Secondly: It is more motivational if you can get some debt paid off and eradicated. When you manage to eliminate an entire credit card you are more motivated to get through the next one especially when the next one is paid off in half the time and the third one even quicker.


This will help you maintain the habit of paying off debt and then institute a habit of saving.