One of the things that really annoys me when I pay with my credit card, is the way I must often select to pay “straight” rather than “budget”. There are grocery stores that have budget payment as the first option – which is ludicrous. That said, there are times when the budget option is preferable.

If you follow my articles, you will know that the best way to manage a credit card is to pay it off in full at the end of each month.

A credit card acts as a revolving loan. If you are only paying off the minimum installment required each month, it will take forever to settle the outstanding balance because the minimum installment is only a fraction of the total amount you owe, and it reduces along with the outstanding balance. This means you are mostly paying interest and very little capital. For example, if your credit card only requires a minimum installment of 3% of the balance and your interest rate is 25%, it would take you around 25 years to pay off a R20 000 balance.

If you are in a situation where there is a big-ticket item like a television or kitchen appliance that you decide to purchase on your credit card and plan to pay it off over a few months, then you should rather use the budget facility.

Chris Wood, executive at Nedbank Card Issuing and payments explains that when you select the budget facility on your credit card it acts like a term loan rather than a revolving loan, so you know exactly how much it is costing you and when it will be paid off.

You can select to pay off the item over three, six or 12 months, and the installment is shown as a separate item on your credit card statement. Although the same interest rate will apply, if you meet those budget repayments, your purchase will be fully paid off over the period you selected. This allows for better financial management.

However, make sure you can meet those monthly repayments, if you miss them, you will be in default and additional interest and penalties can apply. Also be aware of the interest it will cost you. For example, if you bought an item for R10 000 and paid it off over three months at a 20% interest rate, your installment with interest would come to R3 445 per month – or R10 335 in total. That means the item actually costs you an extra R335. If you extended the period to 12 months, your monthly installment would drop to R926 per month but at a total cost of R11 116 over the full period, which is R1 116 more than the purchase price. So you need to balance this with the “saving” you make through a discounted price.

Wood says using your credit card’s budget facility would be preferable to taking those online loans that are often advertised on online shopping sites. Those loans will attract additional initiation and service fees. With your credit card there is no loan initiation fee and you are already paying the monthly service fee as part of the facility.

While the best option is always to save and then spend, if you cannot wait, then at least use your budget facility to make sure the item is paid off over a short time.

This article first appeared in City Press.