Driving to a shopping centre recently I was greeted by a mass of Standard Bank employees holding placards and wearing Standard Bank T-shirts.
Naturally, I assumed they were on strike but it turned out they were promoting credit cards. Standard Bank’s credit card campaign has revolved around free parking at the centre and the chance of winning R20 000 if you use your card.
Absa has also recently been aggressively campaigning for new credit card customers. Colleagues and friends have been receiving calls from both institutions. When they inform them they already have a card, the bank encourages them to take out another.
Now I must confess I am a great fan of credit cards. They are the cheapest way to bank — as long as you pay off your full amount each month. Although there is an annual card fee there are no monthly fees, no transaction charges when purchasing and you can get up to 52 days interest free. The interest rate paid on credit balances is often higher than cheque accounts and you can even link them to Internet banking to pay your bills.
So why are banks flogging such cost-effective accounts? Because they make a ton of cash if you do not pay your bill in full at the end of the month.
Firstly, if you only pay the minimum balance the 52-day interest-free period is waived and you are charged interest from the very first purchase you made.
Secondly, if you miss a payment you are often charged a penalty over and above the exorbitant interest rate. Depending on which card you hold you can pay a penalty of about R100 and interest rates are as high as 17%.
With the festive season upon us, the banks are strategically placing credit in easy reach when we are most likely to be vulnerable to overspending.
If you were managing your credit card effectively, why on earth would you need more than one? The problem will arise for the consumer when January hits and the credit card bills start pouring in.
With most companies paying the last pay cheque of the year early in December, by the time the bill arrives the customer is flat broke and will never be able to pay off the full balance.
The interest bill will start climbing and the banks’ strategy of offering easy credit today will start paying dividends.
However, that will not be positive for the individuals who are caught in a debt spiral. While economists watch the aggregate number for the country when looking at debt, indebtedness is really about the individual.
On a macro level South Africa’s level of debt is well below international levels and there are arguments that there is still room to grow before we reach a point where we should be worried.
The government is keeping a close eye on private credit expansion and the Reserve Bank will move quickly to hike interest rates if it feels the economy is overheating.
But these are all irrelevant when it comes to an individual’s ability to take on debt.
The bank, for example, will extend a customer a home loan with repayments up to 30% of his or her before-tax salary.
There are not many people who could actually afford to maintain that level of bond once tax, pension and medical aid have been deducted. We all have various financial commitments, from school fees to dependent parents.
As the consumer and person who has to make these repayments, you need to decide how much debt you can incur and not leave it up to the economists or banks, which are simply looking at you as a statistic or cash cow.