Understanding the Power of Credit Cards

Credit card debt is by far one of the biggest problems of many Filipinos. According to statistics compiled by the Bangko Sentral ng Pilipinas, total credit card debt in the Philippine banking system has totaled Php157.394 billion, with Php15.141 billion of these classified as non-performing. These standards are very alarming, and many online sites have given tips on how to reduce or eliminate credit card debt. However, it is important to understand credit cards and how they work, to be able to realize the true value and power of a credit card.

A credit card represents the right to instantly borrow from a bank up to any amount (up to the credit limit) to pay for any kind of transaction. Thus, a credit card has many benefits. First, a credit card allows you to map out your transactions. You can do groceries and pay for utilities on any day, and just settle the full amount before the due date. For instance, if your salary is coming on May 30, and the credit card bill is due on June 5, you can make purchases on May 17 even without having the cash on hand. All you need to do is to swipe your credit card and pay for the balance after when you receive your salary.

Second, a credit card allows you to have money for medical emergencies. It would be hard to get cash and settle the deposit with a hospital on a weekend or on a holiday, but it would be very easy, convenient and safe to bring your credit card and swipe away the deposit.

Third, a credit card allows you to enjoy many benefits, from promos from airline bookings, to installment plans for tuition fee payments. It would be very hard to book the “piso” fare to visit relatives in the province without a credit card.

However, since a credit card represents borrowed funds, the debtor has the responsibility to return it promptly. This is where the problem lies. Many people do not plan their finances adequately. Moreover, the credit card provides a psychological feeling of not spending anything since you do not physically take the money away from your wallet and pay. You only need to shop and to swipe.

Many people walk away from the responsibility of paying for the credit card bill, thinking that the problem can be solved at a later time. However, you need to be aware that unpaid credit card balances are charged interest fees from 2.5% to 3.5% a month. This means that an unpaid balance of Php20,000 can balloon to Php21,424.50 in a period of two months. Moreover, there are other penalties associated with paying late.

Other people end up paying only the “minimum payment” required. This payment seems to be an easy way out. I remember seeing a credit card bill of above Php40,000 having only a minimum payment of Php2,500. Paying the minimum only spares the person from the late payment penalties but the balance and even new purchases become subject to the interest rate of 2.5% to 3.5% a month. For instance, if you only paid Php2,500, leaving a balance of Php37,500, and subsequently, you purchased Php1,500 of groceries, you will have a balance of about Php40,365.

Thus, as with any kind of power, if the power associated with credit cards is abused, negative consequences follow. I suggest that people adequately plan their purchases and not succumb to impulse buying. This may mean not bringing your credit card with you, unless you are going to purchase necessities. This may also mean identifying expenses to see which can be cut down. This may mean buying cheaper coffee and eating out less.

Credit cards are only issued to adults, and this means that people have to be responsible in using this power. Credit cards open many opportunities for people, but if this power is abused, it may mean financial nightmares and ruin. Before you apply for that card, ask yourself, are you for the power of credit cards and the responsibility that comes with this power?

***

The author teaches subjects under Interdisciplinary Studies, and Finance and Accounting Department at the Ateneo de Manila University. He can be reached via email at [email protected] for queries.