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.
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.