Many of us are squeezing into a one-size-too-small monthly income after the multiple interest rate hikes that hit us like successive mini tsunamis over the past 20 months. And, there is no sign that the tide is going to turn any time soon.

In fact, it is going to get worse, say the analysts. With year-on-year CPIX reaching 8.8% in January, crude oil fetching $100 per barrel or more and a Rand that is decidedly weak at the knees, there seems to be agreement among these analysts that when the Monetary Policy Committee sits again in April, they will have no choice but to crank up the repo rate by a couple of notches in reply. For the already beleaguered South African consumer, this is bad news.

Cutting back on unnecessary expenses is probably a very valid response when your one-size-too-small monthly income starts fitting even tighter than before, provided that you deal with ‘unnecessary’ in a circumspect manner.

When the dreaded little windowed envelopes start arriving every month, it is normal to try and see just how much the bare minimum is that we need to pay – after all, most of us have many wolves to keep at bay. Unfortunately the content of most of these envelopes will preclude us from that luxury, politely asking us to pay the full amount in the box at the right hand bottom of the statement.

One of the few exceptions is the credit card statement, and it is only the most resilient among us that will be able to stand up to that temptation in the face of the ongoing interest rate squeeze. But, beware! Capitulating is a very bad idea - one that will see you stepping straight into the jaws of the compound interest trap.

Unless you enjoy a grace days benefit on your credit card, you will start paying interest from the moment that you swipe it at a merchant. Actually, even if you do have a grace days benefit and you don’t settle the full balance before the grace days expire, the interest on the purchases you made during that period will be calculated retrospectively and added to your credit card account.

When you make a payment, the interest portion will be the first to feed. The leftovers will go towards the principal amount. And, when you succumb to the minimum payment temptation, the leftovers will be a very modest portion indeed. What is left of your principal amount remains interest bearing, meaning that you will pay interest on the principal again the following month.

Knowing how your monthly payments are allocated will probably be insufficient to scare you off. It is the impact of how your monthly payments are allocated that will really serve to drive the message home.

To illustrate the effect that minimum payments have over time, we decided to use Absa’s Silver credit card* as an example.

• Amount Owed: R 7,500
• Minimum Payment Percentage: 3%
• Interest Rate: 23%

Assuming that interest rates do not change and that the balance on the card comprises purely of purchases made, making only minimum payments against the balance will result in:

• Principal Paid: R 7,500
• Interest Paid: R 12,883.39
• Period of Repayment: 28 years and 4 months (340 months)

Forewarned is forearmed they say. And, things being as they are, it is not necessary for anything else needs to be said on this topic: these numbers have spoken for themselves.

* The Absa Silver credit card bears an interest rate of 23% on purchases and 24.5% on cash withdrawals. The minimum monthly repayment is 3% of the principal.