Dubai: Let’s assume you have Dh10,000 as outstanding amount on your credit card bill. You opt to pay the minimum amount each month. How long will it take for you to clear the sum? And, more importantly, how much extra money will you end up paying at the end of it?
This is how it will work out:
1. Minimum payment: At the end of every month, the credit card bill gives you an option to either pay the entire amount or pay the minimum deduction of 5 per cent.
Minimum monthly deduction on most credit cards is 5 per cent of the total amount due.
So, on your total outstanding of Dh10,000, minimum deduction will amount to Dh500 per month.
2. Interest charged: You are charged 3 per cent interest every month. So this is how it works:
Dh10,000 - Dh500 = 9,500.
Add a 3 per cent interest to the remainder amount- Dh285 - and your outstanding amount adds up to Dh9,785.
This continues for a period of 50 months with the minimum deduction scheme and, at the end of this period, instead of paying Dh10,000, you end up paying Dh23,255.36. The interest of 3 per cent charged to your reducing balance ends up with you paying an additional sum of Dh13,255.36 over 4 years and 2 months.
3. Balance transfer: Now, suppose you max one credit card and shift the balance or outstanding amount on that card to another one. You end up compounding the problem as the next card may already have an ongoing minimum deduction. You may keep doing this with 3-4 cards thinking you are mitigating the problem by transferring the balance to another card but, in reality, you have just walked into the stranglehold of a vicious debt cycle.