It seems that getting a credit card is easier today than ever before. Banks seem to hand them out arbitrarily. For many people, a credit card is permission to go on a shopping spree.

Before they know it, they’ve reached their credit limit, and the money they’ve borrowed needs to be repaid.

A credit card is like any other loan. You’re offered a line of credit. If you spend against it, you have to pay the money back. And repayments are often accompanied by a hefty price tag.

Is a credit card interest-free?

In a word, no. Banks make their profits with the interest they charge on loans such as bonds, personal loans, and credit card debt. A bank is like any other business. Its primary function is to make money.

When it comes to banking, South Africans know that nothing is for mahala. The only place you’re likely to get an interest-free loan is from the Bank of Mom and Dad if you’re lucky.

Does that mean a credit card is never interest-free?

Again, the answer is no. You can use a credit card as an interest-free loan facility, but terms and conditions apply. Most banks offer an interest-free credit facility, provided you pay the full amount back within a set time period. On average, you have 55 days in which to pay the amount off.

If you elect to use your credit card for a big purchase and pay the amount off over a period of six months, you are going to pay interest. However, if you buy something using a credit card and pay the full amount off as soon as you get paid at the end of the month, your loan is interest-free.

Is interest the only additional cost of having a credit card?

Unfortunately, this is not the case. A credit card comes with initiation fees and monthly or annual credit facility fees. The fees vary depending on the amount of money outstanding on the credit card.

Each transaction on a credit card has a fee which is generally higher than the charge for using a debit card.

What you need to know about having a credit card

• Your credit limit is based on your income.
• All credit cards have fees of some kind, but they vary from bank to bank.
• The interest rates charged on credit cards might be standardised or based on your personal profile.
• Interest rates are linked to the repo rate. The South African Reserve Bank sets the repo rate. It is the interest rate at which the Reserve Bank lends money to the country’s banks. The prime lending rate is the lowest interest rate at which banks lend money to clients. It is the equivalent of the repo rate plus a certain percentage. At present, the repo rate sits at 6.75%. The prime lending rate is 10.25%.
• The interest rate on a credit card is much higher than the prime lending rate. Most banks offer a credit card interest rate in the vicinity of slightly more than 20%.
• Due to the higher interest rate, investigate your other options before using your credit card. For example, funding your studies using a credit card is far more expensive than securing a study loan.