Financial Literacy for Everyone

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Retail credit

If you open an account at a shop and buy goods on this account and pay it off within the interest free period, it is not an expensive method of payment.

However, if you pay interest on the amount in the account, it can become a very expensive method. For example, if you buy a pair of shoes on account and pay it off over a few years, the shoes could cost you double the original purchase price by the time you have paid it off. How much more you will pay, will depend on the interest rate and how long it takes you to pay it back.

Shops often charge the highest interest rate allowed by the National Credit Act, which makes retail credit expensive.

A shop will give you a credit limit (how much you can buy on account) based on your credit record. The better your credit record, the higher your credit limit – provided that you can prove that you have an income every month that is big enough to pay off the account.

You cannot buy for more than your credit limit.

You have to pay back an amount every month. The minimum amount you have to pay is usually a percentage of how much you owe that month.

For example, if you have to pay 20% of the outstanding balance on your account and the total amount you owe is R1 500, you have to pay R300. Therefore, when you budget, remember that your shop account payment could be different every month. It is a variable expense that you have to budget for.