WalletFriend Wisdom Tip #16: The True Cost Of A Credit Card

Here we are back again with a new financial tip! This week’s tip is about the true cost of a credit card.

A credit card is something that is hard to resist. It appears to be a convenient item which you can use to buy anything and it may seem like you have an unlimited amount of money, but nothing could be farther from the truth. A credit card is nothing more than borrowing money that you have to pay back with a possible interest of payments are late.

A tiered interest rate consists of different groups of credit card holders who can’t succeed to pay off the minimum payment of their credit card balance before the due date. If you make sure to be consistent and pay back the minimum repayment before the due date, your rate will be lower in the future. So, the longer period of time that you pay consistently, the lower the interest rate which will be charged in the future. The minimum monthly repayment amount for Citibank generally is MYR 50, which we will also use in the example below. However, it will depend on how much you spend, for example if you spend MYR 4,015 your minimum repayment amount will be 200.75.

If you set your limit at MYR 1,200 it might seem that you have that amount of money to spend. However, everything you spend from this you have to pay back with interest. For example, you want to buy a phone of MYR 1,200 and want to pay back MYR 50 a month. This means you will have to pay back for at least 24 months and this does not even include the interest, so it will take even longer. Based on the current interest rate per annum for credit cards ranging from 10% to 15%, this means you would spend approximately MYR 120 to MYR 240 extra on a phone that is MYR 1,000. Considering the tiered interest rate this amount can increase if you do not succeed to pay of the minimum repayment amount within the due date.

Also, during the monthly payments, you probably won’t be able to buy anything else. Missing a payment or being late is a very bad thing, you will be hit with charges, fees and even more. If you do want to use a credit card, only do it when you are able to pay back the used amount immediately, this helps you to build up a good credit balance and payment history. Prevent paying back for a longer period of time, this is more expensive and you will spend extra money unnecessary.

We hope today made you more aware of how to use your credit card. Stay tuned for upcoming tips!