what can the annual interest payments to your credit card get you?

let’s talk about credit card debts.

do you seriously know how the credit card companies compute those charges that are added to your monthly bill every time you do not entirely pay off the previously due amount? or have you gone past caring anymore?

reading that fine print at the back of your credit card statement would tell you how the company computes for the interests and penalties. late payment fee is pretty straigthforward; they charge you a certain percentage (usually 5%) of your total amount due for the billing period. now, that is Php1k for a Php20k amount due; or, Php425 for a Php8.5k payable. doesn’t hurt your bank account yet, eh? you will see.

the interest or finance charge cannot be checked as quickly as the late payment fee as most banks based the interest charge on one’s average daily balance (ADB) and use below formula:

ADB x Monthly Interest % x 12 months x Days in Cycle/Days in a Year

how do they come up with the average daily balance? click here for salve’s money smart illustration. if you get your last credit card activities reflected in Microsoft Excel, you should be able to countercheck the finance charge the company is billing you for being a good customer and not paying your amount due in full. 🙂

so, what happens if you do not pay your total amount due in full before the next billing cut-off? all your succeeding present purchases will be charged an interest. an average daily balance of Php20k all throughout the year would cost you Php8.8k in annual interest. this is before any late payment charges you might have incurred for not paying before the due date.

Php8.8k!!! a Php20k in time deposit would only give you around Php700 in annual interest income (before w/tax and all!). i mentioned this because there are people who would rather pay their minimum amount due because they do not like touching a part of their money sitting in their savings account.

Php8.8k!!! by keeping the credit card companies in business and not paying your Php20k payable to them, it cost you that much.

now, imagine if your ADB is higher than Php20k (and with credit card companies being too generous with the initial credit limit, it is actually possible to have six credit cards with Php65k credit limit each even if you are just earning Php27k a month. oh, i’ve been there once, believe me. it was such a horrible thing.)

isn’t the world too cruel and unfair? Php734 a month in finance charge didn’t look that menacing, right? what can one buy with that amount in metro manila anyway? that is just a dinner for two or three at gerry’s. it can’t even get you an original pair of havaianas slippers.

but try summing it up and think, think of what you could have afford to do with the extra cash that you do not have now.

and then, maybe, just maybe, you would reconsider your financial situation and take charge of your credit card finances.

as for me, never again. i learned my lesson well.

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