Have you seen some credit card advertisements lately? Charge your monthly expenses…no need to worry…you can pay only five percent of the total…and we will still consider you a good client.
Isn’t that just great? *one eyebrow going up*
Just paying the minimum amount will make you vulnerable to a compounding sinkhole that will suck in your money with the force of a hurricane. There is a personal finance advice that says: Pay as much of your credit card balance as you can, if not the total amount. Let’s put this to the test to find just how much it can save you.
Assumptions:
P100,000 debt (and no additional charge)
Interest: 3.5 percent monthly or 42 percent annually
Minimum monthly payment: five percent
Results:
If you are 20 years old at the time you swiped the P100,000 credit card debt, you will still have debt when you retire by age 65. The interest that you would pay by age 65 is more than double your original credit card debt at P233,266.72 and even after paying all that interest, your principal payment has only reached P99,971.45.
Hopefully, you will bump your head (literal Filipino translation for “mauuntog ka sa katotohanan”) and pay your entire balance when it reaches P1,000. That will still take you 25 years to fully retire your debt.
Isn’t that just great?
Augustus J.V. Ferreria, EVP and chief marketing officer of Generali Pilipinas, who provided the excel worksheet for this computation, pointed out that if you contrast this with paying 10 percent of the original loan every month or 10 percent of the credit limit, you will have:
Total months needed to pay the debt: 13 months
Total interest paid: P25,087.25
What a difference! Paying off just the minimum amount is really a compounding sinkhole. But the neat thing is, with a little bit of guidance, we can all avoid it. “It just takes a little education to put right the financial mess people make in their lives,” Ferreria said.
For Efren L.l. Cruz, author of Pwede Na: The Pinoy Guide to Personal Finance, the minimum amount due is not really bad per se. “It’s a facility credit card companies give to their cardholders to help with liquidity problems. But don’t make a habit of paying only the minimum amount,” Cruz said.
Filipinos owe P99.619 billion to credit cards as of December 2006, P16.337 billion of that is past due, figures from the Bangko Sentral ng Pilipinas, Manila’s central bank, show. That’s way too much money to owe to the financial system. I don’t even want to think what will happen if the borrowers of that P16-billion debt pay only the minimum amount every month.
October 6th, 2007 at 4:35 pm
I have just finished my research study on credits this semester and i have learned that if we cannot eliminate credit at least minimize it.
July 12th, 2007 at 1:30 pm
Guys, you can also ask for free annual fees. yup you heard me right. when it was time for my CC company to collect my annual fee, i called them and asked if they can waive my annual fee.
after several days of them beating around the bush (i had to call again several times because the CS reps who answered me all told me my account did not reflect my request), they finally gave in.
eh pwede naman di ba, you ask them how much you owe totally and say you’re gonna pay all your outstanding balance and have the service cut off, and then apply for another card so that you annual fee is free again!
the truth is these companies do value your patronage (even if i had never paid a cent of interest), so they’d rather retain you as customer. WAIS lang dapat! use your utak! hehehe
July 12th, 2007 at 9:21 am
i use to have credit cards and my husband took care of paying the bills.I was a fulltime mother and housewife.He left for the US and abandond me and my children,leaving me with thousands of pesos in credit card bills.At first I tried paying the minimum amount due but it got a point were I had to choose between paying my debts or buy food for my kids.I have no job.Whatever I earn from direct selling is hardly enough to sustain us.We live in one of the apartment units owned by a relative rent free.We get free lodging while I cook for her daughters who live in one of the units.
The collection agencies have been coming to our place.They’d even call me names like “balasubas“.I war so embarassed.It has gotten to the point where even my children would lie about my whereabouts.I no longer want to live this way but I do not have the resources to pay them.HELP.
June 6th, 2007 at 10:13 pm
Hi Salve-
You and your readers can also use the online calculator in http://bankrate.com/brm/calc/MinPayment.asp
It is much easier.
Cheers!
May 28th, 2007 at 2:30 pm
Hi!
I am recently debt-free from 3 maxed out credit cards and am now down to just one credit card (O balance, mind you!).
My original thinking was that credit cards were evil, but you guys are right, they are good tools if you know how to discipline yourself.
And my personal belief now is that if i don’t have the cash to buy it now, I won’t.
Hope you guys keep this up, it’s a good way to educate people on how to fix their personal finances!