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Credit Card Interest Computation

JVD · 9 · 8175

JVD

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on: Dec 21, 2014, 03:18 PM
Hi! New member here. :hello: I've decided to put more attention to my finances and thought that joining the PMT forum can provide guidance. :watchuthink:

To start off, one of my concerns is how credit cards compute for the interest rate. I have both BPI and Citibank. BPI's way seems simple enough. It's just 3.40% of the previous month's unpaid balance. On the other hand, I could not exactly compute how Citibank comes up with the imposed Interest Charge.

For assistance please. :help: Thanks! :thankyou:


rds

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Reply #1 on: Dec 21, 2014, 03:50 PM
basically, they have the same principle except that rates will vary slightly only depending on bank and type of credit card.

take note however that that your BPI's 3.40% interest is monthly interest "of unpaid balance"; and that "minimum payment" (as stated on the monthly bill), is not the same as monthly balance.

- if you will pay only minimum amount --- you will be charged = 3.40% x balance amount not paid.

- if you will not at all pay (not even the minimum payment) --- you will have additional charges of "late payment" which is a fixed amount approx. 500 - 1000 pesos.

- and the good news for the bank (which is bad news for you):
....even if your monthly bill is only 1 peso if you will not pay minimum amount on time (i.e. 1 peso), they will charge you with 500 - 1000 pesos for that month.
....and all charges for this month, will be added to your next month bill + another charges of 3.40% + late payment charges (wherever applicable).



« Last Edit: Dec 21, 2014, 03:52 PM by rds »


TulogSaPancitan

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Reply #2 on: Dec 22, 2014, 03:35 AM
tnx rds for detailed explanation. it's never a good thing to pay for credit card charges. always pay balance in full so you'll never have to worry about all these charges. you make money that way by accumulating points. and avoid getting credit when you don't have money in the bank to pay for it. friendly advice. ciao.


JVD

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Reply #3 on: Dec 22, 2014, 09:17 AM
basically, they have the same principle except that rates will vary slightly only depending on bank and type of credit card.

take note however that that your BPI's 3.40% interest is monthly interest "of unpaid balance"; and that "minimum payment" (as stated on the monthly bill), is not the same as monthly balance.

- if you will pay only minimum amount --- you will be charged = 3.40% x balance amount not paid.

- if you will not at all pay (not even the minimum payment) --- you will have additional charges of "late payment" which is a fixed amount approx. 500 - 1000 pesos.

- and the good news for the bank (which is bad news for you):
....even if your monthly bill is only 1 peso if you will not pay minimum amount on time (i.e. 1 peso), they will charge you with 500 - 1000 pesos for that month.
....and all charges for this month, will be added to your next month bill + another charges of 3.40% + late payment charges (wherever applicable).
Hi rds, thanks for the response. Actually, I am familiar with the points you've mentioned. I just wasn't able to emphasize that I'm more concerned with how Citibank computes since it's based on a 30-day period. In case you also know, kindly share. :D Thanks!


bajoyjoy

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Reply #4 on: Dec 22, 2014, 09:26 AM
Hi! New member here. :hello: I've decided to put more attention to my finances and thought that joining the PMT forum can provide guidance. :watchuthink:

To start off, one of my concerns is how credit cards compute for the interest rate. I have both BPI and Citibank. BPI's way seems simple enough. It's just 3.40% of the previous month's unpaid balance. On the other hand, I could not exactly compute how Citibank comes up with the imposed Interest Charge.

For assistance please. :help: Thanks! :thankyou:

There are various methods that can be used in computing interest or finance charges on credit card transactions, but generally, at least in the PH, most card issuers use the ADB (ave. daily balance) as the base amount upon which interest and other charges will be imposed. So they look at your daily balance, total everything  and then divide by the number of days to get the ADB. Then they apply the % monthly interest, plus penalties if paid late and such other fees.

But please note, that there’s a difference between those who pay in full and those who pay only partially or the minimum amount. Those who pay in FULL EVERY MONTH, are called TRANSACTORS while those who pay partially are called REVOLVERS.

If you are a transactor, what you purchase today will not incur interest until the next billing period. So if you time your purchase on the first day after your billing cycle, you will not incur any interest or finance until the next due date. That’s around 1 month na walang interest. That’s the benefit for paying in full.

However, if you are a revolver, what you purchase will already incur interest right from transaction date. Not only that, the base amount of the interest is not just the purchase you made this month but will include the previous outstanding balance (carry over) you haven’t paid yet. 

So, let’s say you buy 10,000 groceries today but you have previous balance of 40,000, the 3% monthly interest will be charged not on the P10,000 but the total balance or P50,000 (that’s about P1,500 interest). And if you pay only the minimum, lets say 5,000, and then you did not use your credit card the next month, you’d think you will just have the P45,000 balance to worry about. But no, there will still be interest charged on the balance of P45,000 or P1,350 interest.  Next month you got P40,000 bonus so want to spend all that on your credit card debt so you pay P45,000. You will only have P1,350 balance. But…. Another round of 3% will be charged because you did not pay in full, so you will be charged again P1,390.5 for interest (P46,350 x 3%) on top of your balance of P1,350. Just because you left P1,350 balance last month, you get charged P1,390.50 for interest of the entire previous balance.

That’s how people get buried in credit card debt, especially when they don’t pay the entire amount due.

So congrats JVD and napag-isipan mo maging conscious sa iyong credit card expenses. Its better to limit the use of your credit card to only essential purchases and then settle the debt immediately so you don't incur charges and you enjoy at least one-month interest-free period for your purchases. If you can't be disciplined to do that, its wiser to purchase in cash para macontrol mo pag-gastos mo and you don't get burdened by compounding interest on your credit card debt.
« Last Edit: Dec 22, 2014, 09:32 AM by bajoyjoy »


JVD

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Reply #5 on: Dec 22, 2014, 11:03 AM
There are various methods that can be used in computing interest or finance charges on credit card transactions, but generally, at least in the PH, most card issuers use the ADB (ave. daily balance) as the base amount upon which interest and other charges will be imposed. So they look at your daily balance, total everything  and then divide by the number of days to get the ADB. Then they apply the % monthly interest, plus penalties if paid late and such other fees.

But please note, that there’s a difference between those who pay in full and those who pay only partially or the minimum amount. Those who pay in FULL EVERY MONTH, are called TRANSACTORS while those who pay partially are called REVOLVERS.

If you are a transactor, what you purchase today will not incur interest until the next billing period. So if you time your purchase on the first day after your billing cycle, you will not incur any interest or finance until the next due date. That’s around 1 month na walang interest. That’s the benefit for paying in full.

However, if you are a revolver, what you purchase will already incur interest right from transaction date. Not only that, the base amount of the interest is not just the purchase you made this month but will include the previous outstanding balance (carry over) you haven’t paid yet. 

So, let’s say you buy 10,000 groceries today but you have previous balance of 40,000, the 3% monthly interest will be charged not on the P10,000 but the total balance or P50,000 (that’s about P1,500 interest). And if you pay only the minimum, lets say 5,000, and then you did not use your credit card the next month, you’d think you will just have the P45,000 balance to worry about. But no, there will still be interest charged on the balance of P45,000 or P1,350 interest.  Next month you got P40,000 bonus so want to spend all that on your credit card debt so you pay P45,000. You will only have P1,350 balance. But…. Another round of 3% will be charged because you did not pay in full, so you will be charged again P1,390.5 for interest (P46,350 x 3%) on top of your balance of P1,350. Just because you left P1,350 balance last month, you get charged P1,390.50 for interest of the entire previous balance.

That’s how people get buried in credit card debt, especially when they don’t pay the entire amount due.

So congrats JVD and napag-isipan mo maging conscious sa iyong credit card expenses. Its better to limit the use of your credit card to only essential purchases and then settle the debt immediately so you don't incur charges and you enjoy at least one-month interest-free period for your purchases. If you can't be disciplined to do that, its wiser to purchase in cash para macontrol mo pag-gastos mo and you don't get burdened by compounding interest on your credit card debt.
Hi bajoyjoy. Thanks for the lengthy response. I'm also familiar with what you have discussed. I am a TRANSACTOR myself since I've had my first credit card in 2011. But it's been tough for the past few months and had to be a REVOLVER to get by.

Since I'm used to paying my balance in full before, I did not bother to learn about offers like Cash Advance, Balance Conversion, Balance Transfer, etc. I have incurred necessary credit card balance lately and I'm planning my way to recovery. I thought that these offers might be useful to minimize my interest charges while I still couldn't pay the amount in full. Though this might be out of topic already and had to be discussed in a different thread.

Moving back to the topic, do you happen to have a Citibank Credit Card and know how they compute for the interest rate? I've tried based on what I've read in their website and statement, but I cannot arrive to the exact interest amount. Help? :D


rds

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Reply #6 on: Dec 22, 2014, 04:45 PM
basically dapat a simple  --- balance for the month x interest per month = monthly charges.

check whether yung interest charge given by the bank is monthly rate, but "compounded daily" (pwede kaya?). in that case mas magiging mataas pa yung effective rate as compared to the stated monthly rate.

at kung nag avail ka ng cash advance / balance transfer / deferred payment, ay ibang usapan na rin yun. the computation of those transactions are separate from ordinary balance/debt transactions.


bajoyjoy

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Reply #7 on: Dec 22, 2014, 05:11 PM

Moving back to the topic, do you happen to have a Citibank Credit Card and know how they compute for the interest rate? I've tried based on what I've read in their website and statement, but I cannot arrive to the exact interest amount. Help? :D
Have you tried requesting for a break down of citi's computation? they should be able to provide you the details on how they arrived at that amount, upon your request of course. If they don't, or you dispute their computation and they don't budge, you can course your complaint to the Bangko Sentral, Financial Consumer Protection Department so they will endorse your request directly to citi's top management and be given the appropriate attention. but only if citi did not heed your request or you are not satisfied with their answer (as in you are disputing their computation).

you can have your own computation based on the disclosures in the billing statement and then compare it with what they will give you. just so you can see if they are really following the computation they disclosed.
« Last Edit: Dec 22, 2014, 05:16 PM by bajoyjoy »


francesdeniel

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Reply #8 on: Dec 22, 2014, 11:53 PM
For Citibank:

Interest Charge
If the payment made to the Credit Card by the Payment Due Date is less than the Total Amount Due, if no payment was made to the Credit Card by the Payment Due Date, or if a Cash Advance transaction has been made, an interest charge at the prevailing interest rate will be imposed on the:
Unpaid Cash Advance balance (inclusive of interest charges and fees) from the date of availment until both the Cash Advance balance and its related charges are paid in full.
Unpaid balance (inclusive of interest charges and fees) stated in the previous statement of account and on all new transactions made from the day after the previous statement date up to the current statement date computed from the transaction date until the current statement date.
No interest is charged if the Cardholder pays the total amount due in full on or before the payment due date and has not availed of any Cash Advance.terest Charge
If the payment made to the Credit Card by the Payment Due Date is less than the Total Amount Due, if no payment was made to the Credit Card by the Payment Due Date, or if a Cash Advance transaction has been made, an interest charge at the prevailing interest rate will be imposed on the:
Unpaid Cash Advance balance (inclusive of interest charges and fees) from the date of availment until both the Cash Advance balance and its related charges are paid in full.
Unpaid balance (inclusive of interest charges and fees) stated in the previous statement of account and on all new transactions made from the day after the previous statement date up to the current statement date computed from the transaction date until the current statement date.

No interest is charged if the Cardholder pays the total amount due in full on or before the payment due date and has not availed of any Cash Advance.


 


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