Friday, May 02, 2008

20-Day Interest Free for Credit Cards To Be Removed

Haven't read about this yet in any mainstream media.

SM Mohamed Idris, President of Consumer Association of Penang highlighted over a letter to Malaysiakini on the removal of 20-day of interest free period for Credit Cards, if users do not pay up the previous month of bill in full.

I would look into this from various angles.

To the banks/credit card issuers, it would mean less risk, and make people to pay back earlier. This would also mean that there might be a lot more people would default, as they can't afford to pay for the outstanding debts with more compounded interest.

To the consumer, it would be good to build up this habit of paying up earlier, but for those who have the habit of just paying up in partial or just the minimum RM50 or 5%, this would mean more interest.

To just take a look at how much this would mean for extra cost. RM1,000 for 15% would mean RM150 a year of interest. So, for 20 days, it would be 20 days out of 365 days, and it would mean RM8.22 extra a month.

The impact would be significant, if say a consumer keeps this practice of not paying up the credit card bill in full every month and charges RM1,000 a month. This would mean RM8.22 a month or RM98.64 a year. That's a lot!

I am wriitng this, based on my lay man understanding of how this calculation works. Am happy to be corrected, if anyone knows that what I share is wrong.

Full article quoted from Malaysiakini link above is as follow:-

No interest-free period means more card debts
SM Mohamed Idris | Apr 29, 08 4:27pm
Credit card debts will increase when the 20-day interest free period (the grace period where purchasers will not be charged interest) will no longer be automatically enjoyed by all cardholders.

Cardholders have been informed that from July 1, 2008 (for one bank it is May 1, 2008) only those who make full payment of the previous month’s outstanding balance before the due date will get to enjoy the 20-day interest free period.

For those who make only partial or minimum payment on the previous month’s outstanding balance, interest will be charged on the day the new purchases are posted to the card accounts.

For example, Mr Tan’s July 2008 card statement shows an outstanding balance of RM2,000 but he repays only RM1,000. On Aug 15, 2008, he makes a RM800 purchase which is eventually posted to his card account on August18, 2008. Since he does not settle the July statement in full, interest will be charged on the RM800 transaction from the posting date ie, from August 18, 2008.

Thus, if the new ruling on the interest-free period comes into effect, cardholders will lose out.

For the banks it will mean another source of easy income as on average, only one-third of cardholders settle their outstanding amount in full every month.

Bank Negara must not allow the banks to implement the new ruling. It must revert to the status quo and make the 20-day interest free period available to all irrespective of whether there is any outstanding balance the previous statement.

The writer is president, Consumers Association of Penang.

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