OPINION

Bruce Whitfield
Bruce Whitfield
  • Credit cards are a great financial innovation.
  • Used smartly they can greatly reduce your cost of banking.
  • Make these mistakes, though, and you will be heavily penalised.


You still get asked: “Budget or straight?” when you hand your credit card over for payment at your local Pick n Pay.

At Woolies, though, you have to make the choice yourself now, on the fancy LED screens on their newly upgraded point of sale (POS) devices. The sleek black and white screens offer you as the shopper the two options: “straight” is at the top in a light grey and the darker “budget” option is below. It makes it appear as if “budget” is the default and you need to wits about you to push the other button.

A spokesperson confirmed Woolworths will be updating that screen soon to show the same colours so as to avoid confusion.

It’s unlikely Woolworths set out to confuse its shoppers with the way it laid out payment choices, and the store denies it did, but it demonstrates just how easily you can end up unwittingly paying fees you shouldn’t. Anyone who selects "budget" and completes the transaction will pay for their purchases, with interest, over an extended period.

Credit cards are a great tool, if you use them to your advantage, but can turn into tools of financial self-destruction if you step outside the strict boundaries governing the product.

The first risk you face are skimmers who can make copies of cards with extraordinary ease and before you know it vast sums of money are leaving your account. Banks are generally very good about blocking suspicious transactions or reversing those carried out at a result of fraud so having an SMS alert feature on every transaction that goes through your account is a good protection. If, like some people, you don’t check your bank statements, and the fraudsters are clever, you could find yourself paying for someone else's shopping for an extended period.

But there are lesser, legal risks too. Only draw cash on your credit card if you have no other option. The bank will charge you interest from day one. The marketing is not clear on this, but it is in your contract small print. The idea that you get “up to 55 days free credit” applies only to transactions where you make a purchase on your card, either when you use a POS device or shop online and submit your card details. Buying something like foreign exchange on your credit card may seem like a smart idea because you think you are making a purchase, but card companies treat that as a cash withdrawal and start to charge you interest immediately.

Banks love it when you don’t settle your credit card balance in full. If you owe your bank R10,000 and pay R9,999, then they are entitled – as per the small print – to charge you interest on the full R10,000 rather than the R1 that you failed to pay. It may seem iniquitous, but those are the rules.

They even have a special name for people who pay the minimum amount every month on their credit card statements. They are called “revolvers”, and they are charged significant amounts of interest for extending the agreed borrowing period. That is as opposed to “transactors”, who pay the full outstanding balance monthly, having taken advantage of the reward scheme and the interest-free period made available to them.

Banks are not great fans of transactors as they make lower fees and earn less interest from them. Still, the financial institution does make a percentage every time their customer uses the card, so don’t feel too bad for the bank.

So consumers who are normally transactors need to be wary of spending too much over Christmas and not settling the bill in full as they will be surprised by a new interest fee come January, and starting the new year on a financial back foot is hardly optimal.

Beware of banks bearing credit limit increases. Human nature is a funny thing. If someone tells you that you are worthy of more credit, it doesn’t mean you have to agree to accept the credit limit increase. Even if you do, it doesn’t mean that you have to use it. One credit card industry insider tells me that lenders see an increase in credit usage as they push up their customers limits. It raises the risk of you becoming a “revolver” rather than a “transactor” – and that can get very expensive.

If you like to travel a lot and decide that you are willing to take some risk on the exchange rate rather than buy your forex up front and fix in a price, then be very careful when using your credit card. This relates to the forex conversion rate when you transact offshore. In simple terms, card companies like Visa and Mastercard charge roughly 1% margin on a forex transaction. They pass this onto the banks who then pass it on to you.

That’s fair. Think about the complex web your transaction has to flow through to get to your bank server when you buy an Oktoberfest T-Shirt in Munich, or a drink with an umbrella in it in Thailand – and how that approval happens almost instantaneously. That’s worth paying for.

But my credit company insider tells me there are some additional scheme rules under which banks have the option to charge you an additional 0% to about 7% for the transaction.

“Some banks add as much as they can and balance it off with customers who are overseas with no alternative and no clue what rate they get and few if any people have time when they arrive home to do the admin to find out the actual amount they spent vs how much they were charged. Generally, people simply regard their international travel as massively expensive as there is not proper disclosure around the breakdowns of how the fees are structured.

“Usually banks also load products with different rates, so platinum cards that travel may have higher rates and gold cards have lower rates, for example. So as a start, you need to find out what rates the banks charge for forex for the different cards they issue and use the one that provides the best rate."

Also, be aware of the concept of Dynamic Currency Conversion (DCC). This happens when you are standing at a foreign POS and it asks you whether you want to pay in ZAR or Euro. This is what is called the acquiring bank which is making the trade. It is paying the credit card company the required rate, and then adding it’s own margin. And you can bet your bottom dollar that the rate you are charged is not the one you hear quoted on the radio or printed in the newspaper that morning.

You might, if you have the right data package open up a currency trading app like XE.com and check out whether you are better selecting a local currency transaction. If you are agile and spend a lot on your holidays, it can help you save a couple of percent on the overall cost of your trip.

Those are pretty standard ways of banks separating you from your money. The other, my mole tells me is altogether more unpleasant and it comes down to how much you pay in Saswitch fees.

There is a cost for drawing money at your own bank's ATM. You probably have a package deal and therefore don’t worry about the cost. Drawing at another bank’s ATM will generally cost you an arm and a leg unless your bank has priced this convenience into the package you have with them already. You can get an idea of these fees via Hippo.co.za 

ATM’s are pricey to buy and expensive to run and keeping them operational and getting cash to and from them is particularly perilous in SA, considering the high number of cash in transit robberies and ATM bombings. Your own bank will charge you a flat fee or an ad valorum fee to cover both capital and operating expenses.

It’s pretty cool that you don’t have to spend ages hunting down an “own” ATM while in an unfamiliar place and that you can use any bank's ATM. But that bank will pass that cost on to the cardholder bank, who then passes it on to the cardholder.

“If you look at Saswitch transactions, you see they charge you the fee which is justified – but then you would pay a fee to your own bank even though there is no cost associated with this because there is no underlying cost. In other words is just money for jam,” says the industry insider.

This is, apparently, also a mechanism for larger banks to protect themselves from the challenger brands.

“Imagine the billions which have been paid by people into this jam pot since Saswitch launched in the mid 80s. And the sad part is that generally it’s the poorer debit card carrying parts of the population who transact more at ATMs so they are supporting this fee.”

The upside of the credit card is that you are as likely to get it accepted by Amazon or a corner coffee shop in Azerbaijan as you are at your local Pick n Pay, but be aware that you might be paying more than you need to. You can save money if you take remedial steps before spending outside of the card schemes restrictions.

Bruce Whitfield is a multi-platform award winning financial journalist and broadcaster.

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