Are credit cards with low interest offers the solution to relieving the debt burden?
The Consumer Council has surveyed the emerging market for credit cards with new features of personalised interest rate, interest-tiering, balance transfer, and credit on unused credit line.
These low interest offers will no doubt help consumers who are intent on taking advantage of "cheap credit" to save on interest payment. Highlights of the findings include:
Personalised Interest Rate
Depending on the individual's financial status, this could be as low as 8.3% Annualised Percentage Rate (APR), which are substantially lower than the normal rate of 26.8%. So, do shop around to negotiate for the best rate.
Banks varied also in the terms and conditions (the fine prints) to be eligible for further interest reduction depending, for example, the percentage of the monthly repayment, or if any transfer of other outstanding balances is made to the credit card.
But, most importantly, these benefits will all too soon vanish if the cardholder fails to keep up with the minimal payment by the due date. 13 out of the 26 banks (60%) and financial institutions surveyed would impose a penalty for delinquencies, causing the interest rate to rise to a hefty 44.97% APR.
Interest-Tiering
This means to the consumers: the more they spend, the lower the interest will be. Spending unnecessarily in order to earn interest savings is not very prudent - you may end up paying more interest.
Further, bear in mind that some card issuers adopt what is called a stepwise interest-tiering structure in that only the highest portion of the outstanding balance is eligible for the lowest interest rate, with the remainder subject to progressively higher rates.
Balance Transfer
This purportedly helps to cut down on interest payment through the transfer of high interest rate balances of other credit cards or loans to the new account.
The danger, however, is that the cardholder may start to accumulate new debts before the low-rate balance transfer is fully settled.
For example, in the case of a zero interest rate balance transfer programme offered last year, cardholders are required to spend at least 5% of the balance transfer amount each month in the first year; the retail purchase attracts 2% interest per month while the balance transfer portion 0% interest.
For a $50,000 balance transfer, assuming purchase of $2,500 each month in the first year and repaying on minimium payment, the total outstanding balance at the end of the year would amount to $62,941.
At this rate of repayment pattern, the balance transfer portion alone will take five years to be fully settled; by that time, the cardholder would have paid $32,700 in interest but would still owe the credit card company about $30,000.
In the worst case scenario, should the cardholder make the decision to make minimum payment (3%) only throughout the entire period and assuming no new debt is accumulated after the first year, it will take a staggering 33 years to fully clear the total amount of the debt.
Minimum Payment
This is usually 5% of the statement balance. But according to the survey, 10 out of the 22 card issuers (45%) surveyed have lowered the minimum balance to 2.8% to 4%.
Although lowering the minimum payment will alleviate the financial burden of debts, it will also prolong the time needed for full repayment and naturally cardholders end up paying more interest.
The consequence is mind-boggling: For a $50,000 debt, assuming no new debt is accumulated and repaying only the minimum monthly payment, it will take 15 years to clear if on 5% minimum payment terms, and 63 years on 3% terms.
In their own interest, consumers are advised therefore to clear their credit card debts at the earliest instance possible to avoid sinking into prolonged debt.
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