What your credit card is actually costing you
You may be aware of what your bank charges you for day-to-day banking, but what about the fees on your credit card? Do you know what your credit card is costing you in fees each month?
Credit cards attract three different charges, although not all of them have all three. The charges are a monthly account fee, a credit facility fee and interest on purchases made using the card (see: “Monthly fee vs credit facility fee?”, below, for definitions of these fees). The monthly account fee and credit facility fee can be significant (see table), and these are payable whether you use your card or not.
Some banks have dropped or slashed these fees to a minimum, making their credit cards attractive, particularly to customers in the market for a stand-alone credit card – in other words, a card that is not part of a bundle (see “What is a bundle?”, below).
Stand-alone credit cards can cost you a whack: First National Bank’s Private Wealth card is the most expensive on the market, coming in at a hefty R200 a month (or R2 400 a year). The card attracts a monthly account fee of R187 and a credit facility fee of R13 a month. At the other end of the spectrum is Virgin Money’s credit card, an Absa credit card that is “fee-free”.
But there’s a trade-off on the Virgin card. Irrespective of your risk profile, you will be charged 21 percent interest – which is the maximum prescribed interest rate that a credit provider can charge you for credit extended on a credit card. As is the case with most credit cards, you get 55 interest-free days from the date of your purchase.
Depending on the type of customer you are, the high interest rate may or may not be a consideration for you. For example, if you use a credit card to exploit the interest-free period and then pay the card off in full, the high rate won’t matter, because you will never pay the bank interest. But if you don’t pay off your card in full every month, shopping for a good interest rate is worth the effort.
Willie van Zyl, the head of card issuing at Barclays Africa, says Absa is able to offer the Virgin Money credit card at no monthly fee because the card has “no significant additional frills and benefits”.
Banks make money on credit cards in other ways. Apart from the return on interest and the charges, they receive interchange income, which is the standardised fee merchants pay to the banks for the processing of the card payments, Van Zyl says.
If your credit card forms part of your transactional account bundle, this doesn’t mean it’s not costing you. The cost of administering your credit card is built into the cost of the bundle. While bundle accounts may be more cost-effective than paying bank charges on a pay-as-you-transact basis, these accounts are by no means cheap. The top-end bundles cost between R164 a month (for Absa’s Platinum Value bundle) and R185 a month (for Standard Bank’s Prestige Plus), according to the latest Solidarity Bank Charges Report. In light of such high fees, the big four banks continue to lose customers to Capitec, which is generally the cheapest bank for all types of customers, Solidarity trade union reports.
Capitec offers only one basic bank account, and does not yet offer a credit card. Charl Nel, the spokesman for Capitec, says the bank plans to launch its credit card at the end of October.
“Polygamous” customers, who have switched to Capitec but maintained a relationship with their old bank because of the credit card offering, may be induced to switch credit card providers if Capitec’s fees are low enough.
The bank’s offering will need to compare favourably with the entry-level cards offered by the big four.
In marketing its cards, your bank will typically appeal to your desire for status by trying to persuade you to upgrade your credit card as your earnings increase. But the “upgraded” card comes with a bigger credit facility and a bigger monthly fee. Thrown into the deal are benefits such as free travel insurance and access to airport lounges. But these are not imperatives for cost-conscious consumers who want nothing more than a credit card.
“When choosing a credit card, it is important that you consider not only the monthly fee and interest rates, but also weigh up the different benefits and subtle points of differentiation between financial institutions and card types,” Van Zyl says.
He says some points of differentiation from Absa’s competitors include the fact that the bank:
• Doesn’t charge a monthly fee on secondary credit cards;
• Doesn’t charge a fee when you transfer money from your Absa transactional account to your credit card and vice versa;
• Doesn’t charge you for the debit order from your transactional account to pay your credit card;
• Offers the longest interest-free period of 57 days; and
• Gives Absa Rewards members up to one percent back on their monthly card spend in cash.
“This means that a typical Gold customer who spends R1 500 a month on his credit card will receive enough rewards to cover the monthly fee on the card. If this customer has a value bundle as well, he can effectively avoid paying both the monthly service fee and the credit facility fee because the credit facility fee gets rebated back into the transactional account,” Van Zyl says.
Christelle Pretorius, the spokesperson for FNB’s credit card division, says credit cards have evolved to become far more than merely a tool for credit and, because of the value-added benefits they offer, have come to influence the way in which customers choose to transact.
“Customers are cost conscious, which means that it makes sense to choose a credit card that comes with far more value adds, as making full use of these can far outweigh the cost of the facility,” she says.
For example, on an FNB credit card, you are automatically subscribed to the eBucks rewards programme and can earn up to 15 percent back in eBucks on fuel at any service station and up to 15 percent back at Checkers and Shoprite, Pretorius says.
MONTHLY ACCOUNT FEE VS CREDIT FACILITY FEE
Credit cards offered by Nedbank and Standard Bank attract a monthly account fee only, whereas those offered by Absa and First National Bank (FNB) attract both a monthly account fee and a credit facility fee. Personal Finance asked the banks what these fees cover.
“The account fee covers the transactional component of the credit card, such as transacting, value adds and loyalty,” Christelle Pretorius, the spokesperson for FNB credit cards, says. “The credit facility fee … pertains to the administration and management of the credit facility”.
Willie van Zyl, the head of card issuing at Barclays Africa, says Absa’s monthly account fee covers “the costs associated with the routine administration of the account, as well as the value-added services attached to the account, such as free travel insurance and worldwide access to the Mastercard and Visa network”.
The credit facility fee covers “the cost associated with the routine administration and maintenance of the credit facility”, he says.
The National Credit Act (NCA) regulates and limits the fees and interest that a credit provider may charge you, the consumer. The Act provides for the following fees: an initiation fee (to initiate a credit agreement), a monthly administration or service fee, interest, default administration charges, collection costs, and credit insurance.
The revised regulations under the Act state that a maximum service fee of R60 a month can be charged to cover “the cost of administering a credit agreement, which are the operational costs of the credit provider such as rent, labour, communication, banking, processing of repayments and any other costs related to the administration of a credit agreement”. The Act makes no provision for any charges other than those listed above.
But Van Zyl says the Act does not prescribe what credit providers can charge for value-added services.
Likewise, Pretorius says the NCA governs credit agreements only and prescribes the fees relating to the administration of the credit agreement only.
“The Act does not govern financial services accounts. FNB’s credit card products are credit agreements linked to financial services products, in that you can obtain a FNB credit card product without a credit limit and make deposits that can be accessed through the card. Like a cheque or transmission account, the financial services account portion of the credit card product attracts a fee,” Pretorius says.
WHAT’S A BUNDLE?
The word “bundle” refers to either a bundle of transactions or a bundle of transactions plus a bundle of products and services. Bundle accounts offered to consumers at the middle and lower end of the market are generally cheque accounts with a bundle of transactions for which you pay a fixed monthly fee. Bundle accounts aimed at the high end of the market offer the same plus a credit card and overdraft facility, all for a fixed monthly fee.