If you’re one of the (few) virtuous consumers of credit, you’ll know that in order to benefit from your banking institution’s 55 days of interest-free credit, you need to settle your account within that period.
However, if you short pay - purposely or inadvertently - you are hit with high interest charges.
It seems highly unfair that underpaying even by a relatively small amount will incur the maximum interest charge.
The confusion stems over how the interest-free period actually works on credit cards.
While banks advertise 55 days free of interest, it is the maximum interest-free period consumers are eligible for, and in order to benefit from that, you need to use your card correctly.
If you do not pay off your credit card debt - in full and by the due date - the interest-free benefit falls away and you are charged interest on the full balance for the billing period.
Another factor to consider is the billing cycle. At the end of a customer’s 30-day cycle, they are given another 25 days to settle their accounts in full to avoid the accrued interest being charged to their accounts.
Types of credit
Interest rates on credit cards are lower than interest rates on personal loans. The maximum interest rate on overdrafts, credit cards and petrol cards is 20.5% and on personal loans 27.5%.
Interest rates are also dependent on individual customers’ risk profiles. Short-term transactions are 5% a month on the first loan then 3% a month on subsequent loans; other credit, including furniture and vehicle finance, is set at 23.75% a year and incidental credit, where an account is tendered for goods or services, at 2% a month.
Case in point
A reader, Gordon (surname withheld), complained when finger trouble caused him accidentally to short pay on his credit card. His view is that he was charged interest far in excess of what is permitted under the National Credit Act.
He writes: “Recently, I read an article in a newspaper which disclosed that approximately 50% of bank credit card holders did not pay the full amount due each month, as they were over-indebted.
“I did not consider what this was costing the card holders until I received my card statement from my bank two days later. I noticed I had been charged interest of R520.18 and queried why this charge had been raised, as I had paid R17657.02 before the due date.
“I was informed I had short-paid the full amount owing, which was R17725.52. On checking my statement again, I found I had made a clerical error and had paid the charges for services provided by suppliers instead of the total fees raised by bank, which included monthly service fees which totalled R68.50. So for not paying R68.50, I was charged R520.18.”
The ombud weighs in
The Ombudsman for Banking Services, Reana Steyn, cautions that short paying will cost customers. But she feels the charge of R520.18 levied on a short payment of R68.50 appears “highly improbable”.
“A further enquiry into the statement of account would be necessary in order to ascertain why this charge was levied and how it was calculated.”
She says it’s important for customers to understand how credit card accounts operate.
“The interest a bank is allowed to charge is contained in the terms and conditions of the credit card agreement or credit facility that was concluded between the customer and the bank. If your credit card account has an interest-free period and you pay the full amount due on your account on or before the repayment due date as shown on your monthly statement, no interest will be charged on your account.
“If you do not pay the full amount on the repayment due date, the bank will charge interest on the full outstanding amount. The interest payable by you, once you fall into the second category, is calculated on the outstanding balance on a daily basis, and charged monthly in arrears and is due and payable on the repayment due date and debited to your account.”
Steyn says in terms of the law, banks can charge interest on whatever customers owe from day one. “Otherwise, where is the line if they keep extending the repayment period or making exceptions for customers who may or may not have made a mistake in payment.”
The Act, she says, allows interest to be calculated daily and compounded monthly.
“Banks incentivise their customers to pay. If you pay according to those terms, you won’t even pay the interest rate that the Act allows. If you pay outside of that, the normal rules apply. ”
She adds customers can’t expect banks to bend the rules - even by a little bit. “Where must you draw the line?”