Interest on your credit card is calculated differently in South Africa from how it works in various other countries.

Social media is full of tips on how to maximise the interest-free period on your credit card. The problem is that credit cards in South Africa work differently from those in other countries. This can lead to some confusion for credit card users.

What you need to understand is that South African credit card providers calculate interest at a balance level, not a transactional level.

What this means is that the 55-day interest-free period is not calculated per transaction. In some countries the credit card provider will calculate the interest-free period as 55 days from the date of the transaction. In South Africa, however, it follows your billing cycle.

The 55-day interest-free period is from the time of the start of the billing period until payment is due. Typically, the billing period is 30 days, and a client has a further 25 days before the payment is due (Absa has a slightly longer interest-free period of 57 days).

If you make a purchase on the first day of your billing cycle, then you will have 55 days until you have to settle your credit card bill which includes that transaction. If, however, you buy something on the last day of your billing cycle, you effectively only get 25 days interest free, because that transaction is also included in your balance for that billing cycle, so it would need to be settled within 25 days.

If you don’t pay your balance owing in full on your payment date, interest will be charged.

Also read: Can a credit card save you money?

As Tumelo Ramugondo, head of credit card at Standard Bank explains, the bank calculates the interest on your credit card daily, based on the outstanding balance you accumulate during the billing cycle. If you pay your credit card in full by the due date, then the bank does not post that interest to your statement.

If, however, you only make a partial payment, then the bank will post all the interest that had accumulated on the outstanding balance. Therefore, you lose all interest-free benefits.

An example

You made four purchases during your billing cycle, with a total of R5 000 spent. You owe R5 000 but on due date, you pay only R1 000. Many people think that the R1 000 you paid would offset the interest on the first R1 000-worth of goods that you bought on your card during the billing cycle.

This is not the case. The full interest, calculated daily on the outstanding balance, will be added to your credit card statement.

Ramugondo says there are two types of customers: transactors and revolvers. Transactors pay their credit card in full each month and do not incur interest charges. Revolvers only make a partial payment, and they pay full interest on the outstanding balance each month.

For example, on day one of billing cycle you make a R1 000 purchase. Your outstanding balance is now R1 000 and daily interest is calculated on that outstanding balance, although it is not posted to your account.

On day eight you make another purchase for R2 000. Your outstanding balance is now R3 000 and daily interest is calculated on R3 000.

On day 20 you spend R1 000. Daily interest is now calculated on the outstanding balance of R4 000.

On day 30, just before the billing cycle ends, you spend a further R1 000, bringing the outstanding balance to R5 000.

You receive a statement and are required to pay in full 25 days later (or 27 days in the case of Absa). The daily interest is still being calculated on the R5 000 outstanding balance, but if you settle in full, the interest is not charged.

If, however, you make a repayment of only R1 000, then your outstanding balance reduces to R4 000, but the interest on your credit card continues to accumulate.

During the following billing period you spend a further R6 000 and your outstanding balance is now R10 000 (R4 000 + R6 000) with daily interest being calculated.

Here the banks do differ. For example, if your credit card is with FNB and Absa, because you did not settle your previous balance in full, all transactions in the second billing cycle will attract interest from the day of transaction, as this increases the outstanding balance.

That means the statement in month two will reflect the outstanding balance of R10 000 plus all interest accumulated in both months one and two. You no longer enjoy an interest-free period until you pay the account in full. Only once you pay the account in full will you qualify the following month for an interest-free period. You would then again have to settle the balance in full.

Standard Bank does provide leeway in the first month. A Standard Bank statement in the second month would reflect the outstanding balance of R10 000, plus the interest accumulated on the outstanding balance of the second month. This means the interest on the R5 000 which accumulated in the first month will not be charged.

If you continue to only make partial payments, then you would be considered a “revolver” client and interest accrued will be posted on your statement each month. There is effectively no longer an interest-free period.

If you now pay the outstanding balance in full, in your next billing cycle the interest will not be posted.

There are no smart hacks when it comes to a South African credit card except to pay in full each month.

Some transactions incur interest immediately

There are certain transactions which do not benefit from an interest-free period. Any transactions made using the budget facility will incur interest immediately.

Other transactions that incur interest immediately include cash withdrawals from your credit card, electronic funds transfers out of the credit card, transferring amounts from your credit card to another credit card or bank account, and the purchase of foreign currency.

This article first appeared in City Press.