It is not uncommon for Filipinos to hold multiple credit cards to charge their purchases with since credit card companies have made it easy to get one. Oftentimes, they would even send you pre-approved cards that you can use right away. How many of us go to midnight sales and charge away on stuff that we end up not using and then forget about our purchases like it was just a bad dream? The reality check then comes through mail in the form of our credit card bills. We realize we can only afford to pay the minimum required payment and it’s at that moment, we have been put in a viscious cycle that can be very difficult to get out of. It’s at that same moment that credit card companies are clicking their heels because they have lured yet another one in a trap that will keep them earning for years to come.
Consider this example, let’s say Juan charged P100.00 to his credit card and decides to pay just the minimum every month. Typical credit card insterests in the Philippines are 3.5%/month and the minimum payment is usually 5% of your purchases. One important thing to know about your credit card is that the 3.5% interest is always applied on the starting balance if you are not able to pay the full oustanding balance. Which means, if Juan decides to pay P99, next month’s bill will reflect an interest applied on the previous bill’s initial balance of P100 and not the remaining P1 as Juan might have assumed.
But what if Juan decides to pay only the minimum each month? On the first month, he’ll be required to pay P5 and the next month’s oustanding balance would be P98.5. That means, from the P5 he paid only P1.50 was used to reduce his debt. The rest was used to pay interest. At this rate, 25 years from now, Juan would still be paying that P100.00 he charged 25 years ago!Â On the 25th year, Juan would still have a balance of about P1.07 on his credit card bill even though he has paid a total of about P377 already.
Multiplying Juan’s credit card debt by 100 or by 1000, and you get a more realistic figure of typical credit card debt for Filipinos.
If Juan had opted to pay P5 each month, then he would have paid off his P100 debt in less than 3 years. But he still would have paid around P175.00 to pay it all off.
The first lesson here is keep your credit card outstaning balances to a minimum. The second is always pay more than the minimum amount required. If you can afford it, pay the whole thing off right away.
But it doesn’t mean that credit cards are not useful. It’s still handy to charge emergency purchases on your credit card. And some credit card companies offer discounts if you buy from merchants using their card or offer redeemable points or even airline miles. But always remeber to keep track of your purchases and keep them under control. Don’t be a slave to your credit card.
Personally, I charge purchases in my credit card to earn points and then pay the whole balance off the next month. That way, I get the perks but I don’t pay the interest. All I have to pay is the annual membership fee.
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