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!
May 16th, 2007 at 9:10 am
CONGRATULATIONS hseniel….I hope you will have a wondrful debt free future!!
May 11th, 2007 at 3:40 pm
Thank you very much for this article. I am happy to note that there are a lot of people who share my sentiments of beating the credit card horror strories. I used to be a slave of credit cards and thankfully I was able to pay them all last month. I just feel sorry for all the money I wasted paying for purchases I did not need, I could have saved more.
May 8th, 2007 at 7:43 pm
edmund and steve, my thoughts exactly
thanks for the tips. i know, because i’ve been there. good thing is, it IS possible to get out of the habit, di ba? 
May 5th, 2007 at 8:56 am
Yes salve….on the average I get two offers of pre-approved credit cards per week……bank of america, citibank, hsbc, capitol bank, amex, washington mutual, etc, etc….some offering ridiculously high credit limits! Napapagod na akong mag-shred. I agree with everyone who advised that if you cannot be financially disciplined in having credit cards better stick to CASH. Credit cards should be used for convenience not because you want to make yourself feel better……its not worth it, sasakit ang ulo mo sa bills at the end of the month.
May 4th, 2007 at 12:17 am
It always is a good habit to pay in full in order to avoid paying interest… no matter how small they are… Always buy through card things you need specially if you can pay it in cash. Cards are only there to give convenience, not temporary gratification… Instead of making money work for credit catd companies, why not make money work for you instead?
May 3rd, 2007 at 8:44 pm
Erik A, yes thats a very good topic. Only in da Pilipins, huh? loan sharks tyically charge up to 120% pa, isnt that horrendous? and their clients are wet market vendors etc who can hardly afford the interest. Sigh.
May 3rd, 2007 at 8:44 pm
mastersplinter: and let me add, never charge if you can’t pay in full at the end of the month.
May 3rd, 2007 at 8:40 pm
omski, congratulations!! i know the feeling, hehe, of finally breaking the cycle. great work! im happy for you.
A lot of people like Amex, their rewards is P1 for 1 mile, which is much more attractive than other PAL or Cathay partners. Their annual fee though is a bit on the high side.
May 3rd, 2007 at 8:05 pm
don2x,
“perhaps bir can tap this information in their lifestyle checks.”
what a great idea. they should seriously consider this. although i dont think that would be easy. I have seen what the Anti-Money Laundering Council has to put up and banks here are REALLY super duper uper OC when it comes to their records. The lobby group used by banks do their job too well.
May 3rd, 2007 at 8:03 pm
hi oda: on air miles, the problem is its hard to redeem the seats even if you have the required number of points. i know someone who had that experience in Cathay, and I read an article on that in CNN. Have you ever experienced that? With PAL, its fairly easy to get the seats, but I havent tried with other airlines.
good tip on the insurance offered by credit card companies. I also think that’s pretty lame.
May 3rd, 2007 at 7:56 pm
TraderPinoy, that’s why I dont think credit cards are evil. You know, some people really say that. Most of them have been burned with just paying the minimum. Me, I think they can be a good financial tool IF one has the discipline.
May 3rd, 2007 at 7:47 pm
Hi Erwin R and Jim, you both hit a very important principle — reading the fine print. Next week, I will be writing about that so keep on reading MoneySmarts
May 3rd, 2007 at 7:43 pm
Steve, do you notice how credit card companies send out pre-approved cards to everyone? you don’t even have to apply for it now. Once i got a call offering me a Standard Chartered Gold Card with free lifetime membership. I didnt get it cause i already have two cards and that’s all I need really. And I am not paying membership fees for the cards that I now have.
May 3rd, 2007 at 3:15 pm
I have a Citibank MC for almost 10 years now and it is the only card in my wallet for regular gasoline purchase and automatic e-pass reload (very convenient) , I use it also for occassional impulse buying and resto payment to earn more points..but I always pay in full since about 2 years back already…FINALLY ! I have broken the credit card interest cycle and learned from my mistakes …it really feels good to see “0″ interest on your credit card statement and I intend to keep it that way! I used to have several cards…fell into the trap that I know many people out there are currently into…it’s nice to have many cards in your wallet, you feel safe and secure , you have a backup anytime, you are all powerful in the super market filling up your cart with anything your wish…you can eat in resto charging away …you can buy that nice cellphone and charge it away…your friends will say “wow” “yaman mo”…it has become a status symbol of sorts..at least from my point of view..but then again I bumped my head one time and woke up to the mess I am in …and started to do something about it because I realized this will make my life miserable in very near future unless I do something to correct this…I actually cut in half my other credit cards so I can ‘t use it and then closed the membership after paying the balances…several of my annual 13th month pays before all went to paying credit card balances, until such time I have only one , and never did allowed to have interest payments again…story of my life and I know thousands of others out there…
Actually , I have 2 credit cards with me, the MC is personal and I have one company given Amex (which is more powerfull…;-) ) but I never used the Amex for personal charging …and that is why I consider I have only 1 card now…which by the way several of my officemates have fallen into …you can actually get cash advance from Amex which has a higher limit , but the interest are way higher , due to USD conversions…and I know several people at work are already “wanted” by Amex for not paying….whew!!!
Citibank have called me time and again asking me to upgrade to Gold, with all the perks etc…but I always turned them down because I don’t need it, I am happy with a regular card, you get a Gold , you pay 2x the annual fee…and then the buying power of Gold will increase as well, and of course with it the temptation …a Gold card has the perception of “being rich”… and in this country or any other country , the risks of encountering bad elements goes higher as your financial richie rich status goes up, even if it is just a perception…i know someone with a Gold card..does not use it anymore, esp on resto where you pay without seeing your card being swiped…got victimized by “phishing” is my spelling correct
…the card was not lost it was with him all the time but somebody or several people have managed to get the info on his gold card , maybe in one of the restos… creating a fake card and was able to use it several times before the credit card company finally sees “there is something wrong” and blocked it…luckily he was able to prove he was a victim and was not made to pay the purchases by the fake card…the chances of this scheme is higher on Gold cards vs ordinary cards…
BTW, one little tip I can provide besides sharing my experience (and hopefully somebody out there may learn…) I use my credit card points accumulated for paying my annual fee, so in effect I don’t pay annual fee already…your credit card company may not broadcast that you can do this..ask them. And to repeat as what others here have mentioned, use your Credit card/s for convenience NOT for credit…always pay in full if possible!
Always have cash on hand that you can use in case your credit card company is offline (for food items) or just return the mechandise…
ciao.
May 3rd, 2007 at 11:29 am
@oda
i’m surprised that us credit card rates is just 12 points behind philippine rates. but i seem to have read the stiff competition is causing some american credit card companies to even offer 0% rates. whatever the catch is, they are making money. but i still think they make more on data on purchases of credit cardholders. perhaps bir can tap this information in their lifestyle checks.
May 2nd, 2007 at 10:01 pm
@don
off the top of my head for the 4 credit cards i own the interest rate averages between 20-30%, depending on the card, credit history, etc.
e.g. on my mastercard i’ve had for over 5 yrs, they offered me a higher credit limit at a lowered rate (from 22% to 9%) last year; on cards where there’s no annual fees, the rates are higher; gold and platinum cards are loaded with a ton of features you’ll never get to use and you’re paying for it, too.
btw, i never keep a balance, i always pay the full amt owed…
the credit card companies that i use have not made money off me from interest…well maybe this one time where i paid the wrong amt and i was shocked i got charged interest on my next statement : (
my tips are:
1. obviously pay the amt in full. a credit card is NOT A PORTABLE PAY-BY -INSTALLMENT device. use the card to take advantage of the “time value of money” i.e. money in your hands today is better than in someone else’s (duh!) so if you can delay paying for something (for about 3 wks), why not? it goes without saying that you CAN’T overspend.
2. if youre doing #1 then get a card that doesnt charge you annual fees
3. get cards that offer rewards, i.e. air miles, cash rebates
4. if youre into online purchases, use a different card with a lower credit limit.
5. never get those insurance crap the card companies offer on your balance. hey you wont need to if you stick to #1
6. treat your card as a tool of convenience, nothing more, e.g. if you need to make a large ticket purchase, then you dont have to worry about carrying that huge wad of cash in your back pocket.
7. don’t get more cards than you’ll need. hehe this from a guy who has 4…so much for credibility LOL…to put it in perspective i have 2 rewards card, a low limit one and a no fee gold visa card…i stopped there…altho that shiny platinum card looks good in my wallet…hmmm… : )
these are generally what i do so it may not apply to everyone…just thought i’d share…
cheers,
oda
May 2nd, 2007 at 11:07 am
@oda
what is the interest rate per annum charge by the credit card companies in north america on the average?
May 2nd, 2007 at 10:42 am
@don.
nope that’s not the case. the bread and butter of insurance companies here in north america are still the exhorbitant interest rates they charge.
May 1st, 2007 at 11:51 pm
Good news!
May 1st, 2007 at 11:50 pm
Great tips to all users of credit cards. Kudos!
May 1st, 2007 at 9:31 pm
i think in developed countries, credit card companies offer interest rates consistent with banking rates. they make more money selling information on buying behavior of cardholders to market research firms than on interests. in philippines, most credit cards have 3.5% rate per month (42% per annum) when inflation is just 7% per year.
May 1st, 2007 at 4:59 pm
I often read articles from this section. And I would say, GREAT Stuff! More please.
Most financial experts terminology and offers are very tempting… but when translated into a layman’s term, like the one you did above; it opens Pandora’s Box.
Could you do the same on 5′6 and other Loan Sharks scheme. It may help many Pinoys think twice before engaging in such crippling debt with an overkill interest.
May 1st, 2007 at 4:55 pm
the general rule for credit cards is always this: never use them for credit, only for convenience.
May 1st, 2007 at 2:57 pm
whats great is that when people started using the money borrowed, they didn’t asked questions…now that they finished enjoying the money borrowed,….now they are complaining…..
the culprit here is the WRONG and ABUSIVE usage of credit cards…….
go figure…
May 1st, 2007 at 2:51 pm
It always pays to read the fine print–and yes do a little computation.
May 1st, 2007 at 9:56 am
Hiya
What can I say!
Philippine Central Bank does not require as to what are the standard understandable information that should be communicated in any form of borrowing! In fact, there’s no legal requirement to explain what someone is borrowing and the cost of barrowing. None at all, some even use inaccurate or technical terms like “co-borrower,” “repricing,” etc name it you got it.
If anyone would say naloko ako! No you’re not, Central Bank is just not doing much and, hopefully not, continue to ignore particularly the small borrowers.
Sorry, I feel helpless at the moment!
Thanks to my kababayan
Erwin R
May 1st, 2007 at 8:11 am
Thats why banks entice shop-aholics to apply for credit cards because they are considered goldmine for credit related activities….aray! kawawa naman tayong mga consumers kung papayag tayong manatiling ignorante.
April 30th, 2007 at 11:18 pm
[...] Money Smarts: Credit cards: The true cost of paying only the minimum [...]