Impact on Net Worth if you choose NOT TO Settle Credit Card’s Outstanding

Most of us knowing that the interest rate charge on credit card is 18% per year,  which also means 1.5% per month (18% / 12 months ). However, bear in mind if the amount of the monthly interest in the credit card statement is not settle, there would be interest on interest, the compounding on interest within a year will amount to 12 times. This thus gives rise to Effective Annual Rate (EAR).

	EAR = [ (1+Nominal Annual Rate/12)12  - 1 ] x 100%

 

                     = [ (1.015)¹² -1] x 100%

                    = [ 1.1956 – 1] x 100%

                    = 19.56 %

Hence, we should clearly know the effect of credit card cost and manage it well.

What would be the impact on your net worth if you choose not to settle the outstanding?

	Total Asset  = Total Liabilities + Net Worth

 

[His Debt]

Let’s say Alan owes credit card balance RM 10,000 at the end of each month. EAR as calculated above 19.56%, implies he has to pay interest charges of RM1,956/yr.

[His Asset]

He keeps RM 50,000 in FD with annual interest of 2.5%, and no other asset besides FD.

RM 50,000 = RM 10,000 + Net Worth

Net Worth = RM 50,000 – RM 10,000 = RM 40,000

If Alan just allows the interest on both asset and liabilities to accumulate, what would happen after 10 years?

  

Table A shows the growth of amount owing under Credit card.
Year	Begin Balance	Interest 19.56%	End Balance
1	RM 10,000	RM 1,956	RM 11,956
2	RM 11,956	RM 2,339	RM 14,295
3	RM 14,295	RM 2,796	RM 17,091
4	RM 17,091	RM 3,343	RM 20,435
5	RM 20,435	RM 3,997	RM 24,432
6	RM 24,432	RM 4,779	RM 29,212
7	RM 29,212	RM 5,714	RM 34,926
8	RM 34,926	RM 6,832	RM 41,758
9	RM 41,758	RM 8,169	RM 49,927
10	RM 49,927	RM 9,767	RM 59,693
** Assuming no penalty charges for no payment for 10 years.
Total Liability Increased RM49,693 (from RM10,000 to RM 59,693)

Table B shows the growth of Fixed Deposit.
Year	Begin Balance	Interest 2.5%	End Balance
1	RM 50,000.00	RM 1,250.00	RM 51,250.00
2	RM 51,250.00	RM 1,281.25	RM 52,531.25
3	RM 52,531.25	RM 1,313.28	RM 53,844.53
4	RM 53,844.53	RM 1,346.11	RM 55,190.64
5	RM 55,190.64	RM 1,379.77	RM 56,570.41
6	RM 56,570.41	RM 1,414.26	RM 57,984.67
7	RM 57,984.67	RM 1,449.62	RM 59,434.29
8	RM 59,434.29	RM 1,485.86	RM 60,920.15
9	RM 60,920.15	RM 1,523.00	RM 62,443.15
10	RM 62,443.15	RM 1,561.08	RM 64,004.23
Total Asset Increased RM14,004.23 (from RM50,000 to RM64,004.23)

Net worth Alan decreased by RM 35,688.77 !!

See the findings! If Alan chooses not to bother to settle the credit card payment, when he has the cash to do so, his personal net worth would

decrease from RM 40,000 to RM 4,311.23. (64,004.23 – 59,693).

The impact is much greater than you can imagine!