Bizcommunity.com reported in August that Standard Bank recorded a 52% year-on-year increase in new credit cards issued up to the end of August 2024 compared to the same period in 2023. While concerning, this increase is not surprising. It highlights the financial strain that many households are facing.
The state of our local economy is challenging, to put it mildly. The economy grew by just 0.4% in the second quarter (April – June) of 2024, largely due to the recent reduction in loadshedding. However, this modest growth is not enough to ease the financial pressures on many households.
If you have a credit card – or any other form of short-term debt – it is critical to pay it off as quickly as possible. But do you know what your credit card debt is really costing you? At a minimum, most credit cards charge interest at prime minus 0.25%, which is currently 11.75%. However, this rate is rare. A recent survey suggests that the average rate is repo rate plus 14%, amounting to 22.24%.
For example, if you owe R50 000 on your credit card, here’s how much you would pay over a 24-month period at a 20% annual interest rate, using a compound interest loan formula.
The monthly payment formula is:
Where:
- M is the monthly payment.
- P is the principal amount (R50 000).
- r is the monthly interest rate (annual interest rate divided by 12).
- n is the total number of payments (24 months).
Based on this formula, your monthly payment would be approximately R2 544.79, excluding monthly credit facility and account fees. Over 24 months, you would pay a total of R61 079.96, which includes R11 080 in interest!
However, if you were to pay an additional R500 each month, increasing your payment to R3 044.79, you would repay your debt in 20 months and pay only R8 913.83 in interest – a saving of R2 166.17 in interest.
The takeaway is clear – avoid buying on credit unless absolutely necessary. If you’re struggling with debt, reach out to us at DebtGrip. We’re here to help you take control of your finances.
