10,000% per year?

credit card interest 10,000% per year? giler!

from STAR - 07/03/09

LET’S say you have an outstanding balance on your credit card of say RM100. And you just forgot to pay your bill on time. What do you think your charge will be on an annual basis? Would you believe 10,000%?

The answer is very illuminating but you have to read the fine print to find out. I just did when I saw a late payment charge of RM40 on my bill because a payment of RM4,000 was late by a few days.

First, you have to pay up to 18% a year on the outstanding amount. Second you pay a charge of 1% or RM10 on the outstanding amount the moment you go beyond the repayment deadline. You have 20 days free credit but only if you pay on time. Otherwise, it is 18% from the date of purchase even if you choose to pay in instalments plus your penalty charge if you are late.

Let’s say you are late by a week, which is very normal for a lot of people – in other words, by a week you failed to pay a minimum 5% of your outstanding amount or RM5 in our example of RM100.

For that one-week delay on that RM100 outstanding you pay the minimum charge of RM10. Let’s calculate the charge in percentage terms per year. That’s 10% (10/100X100) for one week or 520% (52x10) for one year, not compounded! Total interest charge: 520+18 or 538%. You pay RM10 because you are late with your instalment payment of RM5 and you still have to pay that instalment.

But hang on a second? Are we calculating this right? No, it’s not quite accurate – in fact we have made a terrible, horrible mistake. You see, you are being charged RM10 on the RM5 instalment that you did not pay on time, not on your outstanding balance of RM100 on which you are already paying 18% a year.

Yes, it’s becoming mind-boggling. If you are a week late, you pay 200% (10/5X100) a week or 10,400% (200X52) a year!! I don’t often use double exclamations but you must admit that it is deserved here.

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