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Have you tried to look at the math of a purchase
charged to your credit card and see how long it will take you,
assuming that you only pay the minimum amount due, to pay off this
purchase, what you will end up paying in interest, and how long it
will take you to pay off the balance?
For example, say you charge
P50,000 for a laptop. A few weeks later, you get your bill and since
you need to pay other expenses, you decided just to pay the minimum.
Most cards bill on a monthly basis. Finance charge varies from 1.5
to 3 percent per month for those who pay only either the minimum
payment (which also varies from 2 percent to 5 percent of
outstanding balance) or anything less than the full amount charged.
The following month, here comes
your bill. Let us assume you made a minimum payment of P2,500 and
did not make any purchase after the laptop. Your bank’s interest
per month is 3 percent of the P50,000 charge price or P1,500. This
means that of P2,500 payment made, only P1,000 went to the
principal. If you just make the minimum payment each month, most of
your money goes to the finance charges and you end up paying far
more for the laptop.
As an illustration, if you made a
purchase of P50,000 and you just pay the minimum amount due of 5
percent of the outstanding balance each month while being charged 3
percent per month for the unpaid portion, it will take you 31 months
to fully pay off your P50,000 initial purchase. This is assuming you
do not make any purchase after that. Multiply P2,500 by 31 equals
P77,500 or an interest payment of P27,500.
The same scenario above with a
payment period of 24 months will make you pay P2,952 per month for a
total payment of P70,848 or an interest payment of P20,848.
Simulating other payment schedules which rely on paying anything
less than the outstanding balance will always result in substantial
interest payment for the consumer.
And the charges rise
exponentially as you make additional purchase. Since you are treated
as a borrower of the bank’s funds, even your subsequent purchases
are already levied interest charges at the time the billing is
posted by the credit-card company.
The preceding is a simple
computation of charges in case you avail of installment payment
instead of fully paying your balance. Banks however may have
different ways of handling such transactions and it is important
that consumers understand the attributes that make up the terms of
credit cards which most credit-card holders, by the way, do not pay
much attention to.
-The following are some of the
details that you have to check about your credit card:
-The rate of interest in case you
opted to pay the minimum or you availed of the deferred payment plan
and the penalty for late payment.
-The fees and/or rules for cash
advances and how banks compute the finance charges.
-The term “grace period.” If
you pay your balance on time and in full, you will never pay any
finance charges (except for a cash advance). If, however, you have
carried a balance over from the prior month, you do not enjoy a
grace period.
-The use of points earned in
using your credit card that can be applied in the annual dues or
other items that the bank offers.
And most important, the rate of
“minimum payment due.”
Owning a credit card may be
convenient and very helpful—especially when it comes to
“emergency” purchases that you need but “cash” is not
available. Make sure, however, that you know the simple math behind
the charges. And have discipline in the use of the plastic money.
The author teaches at the De
La Salle Professional Schools Ramon V. del Rosario Sr. Graduate
School of Business. She is the chief financial officer of Orient
Freight International, Inc. She welcomes comments at mhel_cc@yahoo.com.ph.
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