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Understand how your credit card budget facility works
A credit card is a fantastic financial tool that offers you flexibility and choice you can’t easily get anywhere else.
The budget facility on your card, for instance, is like having an instant loan you can use whenever you need. It’s important, of course, that you don’t get carried away and use up all your available credit simply because it’s there. This discipline is easier to keep if you understand how and when to use your budget facility.
What exactly is a budget facility?
Whenever you've used your credit card, you’ve probably been asked whether you want to buy ‘on straight or budget’. If you choose ‘straight’, that means you intend to repay at least the minimum monthly amount, which is 2,5% of your outstanding balance.
But when you choose ‘budget’ you have to choose over how long you want to repay the amount. You can choose to repay over 3, 6, 9, 12, 18, 24, 36, 48 or 60 months.
The longer the period you choose, the lower your monthly repayment, but you will also pay back more in interest. When you use your budget facility, that also means you pay back the same amount every month until you’ve repaid what you owe, just as you do with a personal loan.
The pros and cons of using budget
The advantage of using your budget facility is that you know how much you’re paying every month, and for how long you’ll be paying back. One disadvantage of using ‘straight’ credit is that you will be charged interest on that amount from day 1 on the budget facility. This interest rate is a set percentage for your card and is the same if you buy on straight or on budget. You can avoid paying interest on straight charges to your card if you settle that amount within 55 days of your purchase.
When to use your budget facility
Typically, it makes more sense to buy expensive items on your budget facility. Things like a new lounge suite or a generator to power your entire home during loadshedding would make sense.
Yes, you’re charged interest immediately, but it’s easier to manage your monthly expenses when you know exactly how much you need to repay on your budget facility.
If you’re buying items like monthly groceries or school uniforms, it would be better to repay those faster. After all, you can avoid paying any interest when you buy on straight by repaying that within the 55-day period. The best way to do this is to use the Nedbank Money app to manage your credit card and choose to settle the full balance every month, instead of the minimum monthly amount.
How much can you buy with the budget option?
The amount of credit you have available to use on budget is limited only by how much credit you have available. Say the credit limit on your card is R20,000, but you’ve used up R5,000 already. This means you have R15,000 credit still available. You can use this amount on either straight or budget, but it will decrease with every purchase and increase with every monthly payment you make.
Limitations on your budget facility
Although the budget facility gives you flexibility and choice, there are a few instances that you can’t use it. These include buying travellers cheques, foreign currency, making payments such as your home loan repayments, and filling up with fuel.
With a better understanding of how your budget facility works, you should now be in a better position to decide how and when you want to use it. It’s clearly a powerful tool that can unlock a world of possibilities when used correctly.
