What is credit card interest and why is it necessary? In this article, we will learn about credit card interest , how it is calculated, and why we should not choose to pay the minimum amount so that we can understand and plan our credit card usage better without having to go into huge debt.
What is a credit card and what are its benefits?
A credit card is an electronic card that can be used to pay instead of cash. It is considered a form of personal loan provided by commercial banks or financial institutions. When we use a credit card to pay for goods, the commercial bank or financial institution that issued the credit card will pay the expenses for us first. Then we pay back the money according to the period specified in the contract to the bank or financial institution later.
The benefits of credit cards come in many aspects, such as we do not need to carry a lot of cash to buy products or services. We can use credit cards instead. And it also allows us to use first, pay later. Supports urgent emergencies. In addition, using credit cards also provides many other benefits, such as discounts and special privileges with various stores or department stores, points, 0% installments or Cash Back (credit card refunds), etc.
What is credit card interest and why do we need it?
Every time we use a credit card to buy goods or services, it is like we borrow money from a commercial bank or financial institution to use first. The bank or financial institution gives us money to pay for the goods or services first, and we have the responsibility to find money to pay back. If we can pay back the amount we used in the specified period, we will be free from interest because the interest will not be calculated until the grace period has passed.
But if we can’t pay on time or pay only part of it, such as we can only pay the minimum amount, it means that “we are already in credit card debt.” The bank or financial institution that issued the card will charge us interest. This is the reason why many people have a large debt due to a lack of discipline in spending.
Problems that cause credit card interest
1. Sometimes we may forget, causing late payments, not on time. In this case, even if we pay the full amount, we will still have to pay interest from late payments and late payment penalties. It is best not to let the payment date be past due in order to avoid unnecessary penalties and interest.
2. Sometimes we accidentally swipe our cards to buy a lot of things, forgetting that we may not be able to pay the full amount, so we have to choose to pay the minimum payment or choose to pay only a part of the amount. In this case, it means that we have already accepted that if we do not pay the full amount even though we pay on the due date, we will definitely have to pay interest.
3. Sometimes we may not have enough money but we do not want to borrow from anyone and cause trouble. So we choose to withdraw cash from our own credit card. Whenever we withdraw cash via credit card, in this case, there will be no interest-free period like when swiping the card to buy products because it is a different purpose. That means if we choose to withdraw cash via credit card, the interest burden that we have to pay will be calculated from the day we withdraw cash immediately until the day we pay the full amount. And we may have to pay a cash withdrawal fee as well (approximately 2-3% depending on the card and the bank that issued the card).
4. Sometimes we want to have, want to have, like other people, so we have to swipe to buy those things, but choose to pay in installments. Some products may have installments with interest, or some items are 0%. If we choose to pay in installments with interest, interest will be calculated and included in the installment amount. Therefore, when making installment payments for any products, always study the details first to see if it is 0% or with interest, in order to prevent unnecessary interest burden.
Why shouldn’t we choose to pay the minimum ?
If we choose to pay the minimum, we will definitely face a high interest rate of around 16-20% per year (depending on the card and the bank that issued the card). In addition, if we choose to pay the minimum over many billing cycles, our debt burden will increase even more because the interest rate that is calculated will increase continuously. Until finally, we may not be able to bear the credit card debt because now it has become a large debt.
Example of how to calculate credit card interest
Suppose we have a credit card with a bank. The bank will summarize the amount we have spent on the 25th of every month and will bill us in the next 2 weeks.
And let’s say we use this credit card to swipe and buy a washing machine for 20,000 baht on July 5th. The bank that issued the card will summarize the total on July 25th to show us how much we have to pay. Then in 2 weeks, they will collect the money, which should be around August 8th. If we choose to pay a minimum of 10% on August 8th, it means that we have to pay 2,000 baht. The credit card interest will be calculated in 2 parts as follows:
Credit card interest = (Credit card spending amount x Annual interest rate x Number of days) / 365
Part 1 : For the date of credit card use until the payment date, interest is calculated from July 5 to August 8.
Credit card interest = (20,000 spending amount x 20% annual interest rate x 34 days) / 365 days = 372.60 baht
Part 2 : Balance of 18,000 baht (because the minimum payment of 2,000 baht has been made) Interest is calculated from August 8 to August 25.
Credit card interest = (Total spending 18,000 x Annual interest rate 20% x 18 days) / 365 days = 177.53 baht
Total billed amount is 18,000 + 372.60 + 177.53 = 18,550.14 baht for the next billing cycle.
And if you continue to choose to pay the minimum amount, you will have to deal with compounding interest, which will eventually lead to a large debt that you cannot handle.
Additional precautions: For example, if we still have an outstanding balance on a credit card and we continue to use that credit card to make additional purchases, the new spending amount will be added to the original outstanding balance. Therefore, do not do this because it will increase the debt even more. Therefore, we should stop using the credit card with an outstanding balance first. Then plan to close the outstanding debt completely. Otherwise, the credit card interest will be calculated continuously, which will make us unable to pay off the credit card debt.
Conclusion
From the explanation above, it can be seen that credit cards, if selected correctly and with discipline in spending, are very useful. However, if we lack financial discipline and spend beyond our means on credit cards, it will immediately create unnecessary debt for us. Therefore, before using a credit card, always think before using it, whether we will have enough money to pay or not?
Recommended articles :
