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ABSA IS HOPING its new treatment of its credit card clients’ spending limits will become a big money spinner, as recent trading updates from competitors FirstRand and Standard Bank show muted consumer appetite for taking on new debt. Instead of having separate limits for both a “budget” and a “straight” option on its credit cards, it will – from next month – consolidate client credit limits into a single figure. In that lies the danger for its clients, who will be effectively encouraged to take up more credit over a longer period of time than they might previously have done. That translates into a wonderful opportunity for Absa, which is seeking to keep high interest-paying clients on its books.
Absa anticipates a greater number of clients will use what’s ultimately the more expensive, longer duration “budget” option on what will effectively be a larger overall credit limit.
Absa is following the example of Standard Bank, which combined its separate limits about five years ago. For example, if you had a budget limit of R5 000 and a straight limit of the same amount, Absa is now giving you a single limit of R10 000. It’s a neat way around the National Credit Act, which forbids increasing a credit card limit without proper affordability checks and the consent of the account holder.
“You already have a credit limit of R10 000 – so we aren’t actually increasing the facility size,” says Simon Just, who speaks on behalf of Absa’s card division.
However, what it is doing is making it possible for its clients to buy goods and services to a higher value over a longer period of time, thereby extending the duration of the repayment period. At an average interest rate of around 17% over its numerous credit card products, the longer Absa can keep its clients in debt – and servicing that debt – the higher its returns will be.
Sensible credit card users don’t access the budget element of their credit card accounts, as it ties them into longer repayment periods and thus higher interest bills over time. The only way to sensibly use a credit card is to pay off the outstanding amount in full every month or run the risk of being stung by substantial interest charges. Banks prefer you not to operate that way, as it limits their fee collection ability.