Credit cards: The true cost of paying only the minimum

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.

Share This