The true cost of credit

Credit cards, retail accounts, and other credit buying options are popular choices when making purchases. But do you know much you are really paying for that one small purchase? You’re not only paying your monthly repayments but other fees as well; interest, penalty fees, account fees, and purchase charges. These are crucial to remember when buying on credit so that you are aware of how much you will be paying in the long term. One other factor that also affects your cost of credit is how you pay back your loan, for example, an early payment discount. The following fees fall under the cost of your credit;

 

  • Interest rates

The interest rate is charged as a percentage of the total loan or credit amount given by the lender to the borrower. Every month, you pay interest on top of your loan repayments. This means that the faster and more you pay off your loan, the less you will pay in interest every month. You can be charged the maximum interest rate by your lender, following the repo rate. As of September 2020, this is 7% per annum. 

 

  • Initiation fee

This is the first, once-off payment for entering into a credit agreement with a lender. A maximum initiation fee is allowed to be charged for a credit card of R150 by the National Credit Act. 

 

  • Admin fees

As allowed by the National Credit Act, 10% of the credit agreement limited to R1140 including VAT, as well as R57 per month, can be charged. 

 

  • Credit insurance

Credit insurance covers your debt when you pass away or become unemployed so that your family or loved ones do not have to have that financial burden as well. 

 

  • Penalty fees

These are applicable fees if you go over the credit limit on your card or pay your installments late. 

 

 

  • Collection costs

You can be charged for the collection of your outstanding debts. 

How to calculate the cost of credit?

The time when you pay back your loan can reduce or increase how much your credit is costing. Paying your loan back before the agreed loan term means that you will be able to avoid certain fees and higher interest accumulations. However, if you take longer to pay your loan back, penalties and late fees are added which increase the cost of your credit. 

 

 

The cost of credit is calculated by determining the cost of an early payment discount. Knowing this is useful when you have enough money to be able to make an early payment and benefit from a discount if your cost of credit is already high. 

 

The formula to calculate the cost of credit with an early payment discount is;

 

Discount %/(100-Discount %) x (360/Allowed payment days – Discount days)

 

For more information on how to use this formula, make use of the online cost of credit calculators. Find out your credit details and what the period of discount will be so that you can work out your cost of credit. 

Let interest work for you

Interest can also act as a tool to help you grow your finances when used with a savings account. Set up a savings account and contribute a monthly set amount. Interest will accumulate over time and increase the money that you have put away. 

 

Another way to save on interest is by having a higher credit score. The higher your credit score the more you’ll be able to negotiate for a lower interest rate. This is because creditors will be able to see that you are more trustworthy with credit from your score and previous agreements. A lower interest rate would be beneficial if you are taking credit out or applying for a loan. 

 

Managing your credit in terms of making your payments and being aware of how much interest you will be paying is key. Budget for credit costs to make sure that you are fully covered and avoid paying back your loan late. The true cost of credit can be easily navigated if you are prepared and responsible when using it.