Manila, Philippines

Credit Card Basics for Consumer Protection Part 2

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Previously, we just introduced you to credit cards basics part 1

Now here we discuss billing cyles, repayments, etc. 

Plus some tips for responsible usage. Read on!

Billing Cycles

Just like water and electricity utilities, postpaid lines and cable services, credit cards have billing cycles. This is the predefined period of which all the transactions made within that period, will be billed in the next due date. The start and end of a billing period is marked and called the ‘cutoff’.

For example, if your card cutoff is every 12th of the month, then all transactions made from July 13 to August 12 will be billed to you on the next due date (cutoffs can move a few days earlier or later due to weekends or holidays). Usually, the next due date is 21 days after the cutoff, so in this example, the due date will likely be September 2. Note that issuing banks have different cutoffs for their cards and different card types have different cutoffs as well. Still, the gist as explained above is the same.

Due Dates

So in summary, all card transactions made from Jul13-Aug12 will be payable by Sep2. So on and so forth for the next months. From here, you can already see the credit card advantage: that purchases made need not be paid immediately. That purchases made on Aug13 (start of new billing cycle for this example, which ends Sep12) will be due on October 2 already. So that’s more or less a maximum of 50 days financial leverage for you, and minimum of 20 days. Not bad right?!?

The next challenge is to use this leverage wisely. Otherwise, you can end up in a debt trap. Note that due dates for the previous billing cycle actually falls within the next billing cycle (Sep2 due date for Jul13-Aug12 cycle is within the Aug13-Sep12 billing cycle, which is in turn due Oct2.) So better remember the dates to avoid confusion.

Minimum Payment Due / Minimum Amount Due 

Now that you know what a billing cycle is, and the 20-50 day leverage, we go now to the fees. Assume you consumed Php2k of you credit limit for a certain cycle. This Php2k will be due the next due date, and this is called the billed balance. However, in your statement of account (SOA), the issuing bank will actually give you a Minimum Payment Due (MPD). Others call this minimum due amount (MDA) or minimum amount due (MAD). However this amount is called, this is usually computed as certain % of billed balance (from experience it is 3% to 5%) or a certain amount like PHP200 to PHP500, whichever is higher.

So for a Php2k billed balance, for example the MPD is 5% of Php2k or Php500 whichever is higher = Php500. I know of a bank though which has no minimum amount as part of MPD, just % of billed balance. So if your card is from this bank, your MPD for the month is just 5% or Php100. Very small right?

What is the MPD for? This is the minimum amount you need to pay so that your card remains updated/current. Failure to pay up to the MPD renders your account as past due and if this stays unpaid, for the next 9 to 30 days, your card can be considered delinquent. 

I just need to pay the MPD and I’m okay? How about the rest of my balances? The MPD may be as low as Php100 and the offer to pay just that small amount may seem very enticing, but note that charges apply if you don’t pay the billed balance in full (i.e. if you just pay the MPD), as discussed below.

Partial Payer = Finance Charges

The billed balance less the MPD paid will be assessed with Finance Charges (FC) for the next billing cycle: the charges for not paying the billed balance in full. This is also called the charges for being a partial payer (aka revolver), and not being a full-payer.

Credit card FC usually range from 2.75% to 3.5% monthly charged on the unpaid billed balance from the previous cycle. This finance charge is what usually buries the uninformed card user into deep debt. Imagine, if you keep on paying MPD every month, your billed balances from previous months pile up and remain just partially paid: what remains of it incurs FC charges. It may look small but the billed balance that incurs FC actually grows almost exponentially with every month that passes by.

Even the FC charges billed on your card last month, may incur FC charges again this month, if you just partially pay and not pay the balance in full. Imagine, that’s already interest on interest. Issuing banks will keep on charging FC as long as the billed balance (from previous and current billing cycles) is not paid in full. So be careful. Be very careful.

Late Payer = Late Charges

There are other charges with using the credit card. Late Charges (LC) are charged  for past due payments: for paying late, for paying past the due date. The more late you are, the higher the LC.

Excessive User = Overlimit Fee

Overlimit fees (OL Fee) meanwhile are charged for transactions in excess of your credit limit. Yes, in general, you can only swipe and transact up to your credit limit, but there will be instances that issuing banks will allow your transactions and balances to go a bit over the credit limit, in exchange for OL Fee. Wise huh?

Cash User = Cash Advance Fee

Cash advance or the withdrawal of cash using a credit card also incurs cash advance fee. This is similar to getting a loan with interest, except that you get the cash faster via your credit card. Note though that a cash loan is usually in monthly installments whereas cash advance is billed and due the next due date. Paying the cash advance partially will incur you of FC, on top of the cash advance fee charged to you upon availment.

Loyal User = Annual Fee

Annual Fee serves as sort of the membership fee, for the privileges, perks (points,  rewards, discounts, etc) and leverage that come with using the card. From the name itself, this is charged annually. This charge you cannot escape, unless the issuing bank agrees to waive it for you given your good behavior or your annual spending using the card. Activated cards incur annual fees but unactivated cards do not, since one cannot use unactivated cards.

So many fees huh? So use your card wisely!

Great Power, Great Responsibility

Given all this, we have seen that credit cards can be powerful financial tools given its buy now pay later flexibility. But this flexibility can be turned against us, if we pay just partially, pay late, or go over our credit limits.

As a tip, the best way to use a credit card is to keep your purchases within a controlled level, such that when the due date comes, you can pay the billed balances always in full. Always pay in full. Credit limits are there for flexibility, but they are not meant to be maxed out. Take advantage of the 20-50 days leverage, of the cutoffs, of the less need to carry cash with you, of installment purchases, of the international coverage, but not the MPD. You pay in full and you enjoy the advantages at the cost of an annual fee. Credit cards are powerful tools when used properly. But when abused or misused, credit cards can easily bury you in deep debt.

Of course you don’t want that to happen.

With the above, you can hopefully leverage on the advantages of credit cards. Likewise, be able to avoid being buried in deep debt because of misinformed and irresponsible use of credit cards.

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