Credit Card Debt - May be It Is our lousy Mathematic Skills (Part 1)!
You would have read it already – more than 40% of the 8.8 million credit card holders only manage to pay the minimum 5% of their outstanding balance.
Now it is easy to blame all this on our very own financial carelessness, inability to delay gratifications or the easy credit approval by the financial institutions
But maybe not! May be it is our mathematic skill, or to put it precisely, we are terribly bad at calculating the true cost of borrowing. We have the tendency to believe what the lender told us and we seldom look beyond the simple interest rate calculation, or simply not aware that simple interest rate is not a good indicator to assess the true benefit of saving or cost of loan.
If we can’t get ‘interest rate’ right, as research have shown, we will likely underestimate the cost of borrowing (borrow more) and benefits of saving (delay in saving).
So if you interested, here are some questions to test your “Interest” level
- Let say EPF has declared 5% dividend rate for the next 10 years, so what is your dividend rate for 10 years?
- How long it takes to double your RM1,000 FD with an interest rate of 3%?
- Now let say you want to borrow RM10,000 to renovate your house, assuming 12 months repayment, how much would you expect to pay back in total (any number, be reasonable, pls)?
- Answer “right” or “wrong” : “A short term loan i.e. loans that lasted only a few months is better than the longer one as I can save on the interest payment.”
The ‘answer’ will be revealed in next posting. Meanwhile, please feel free to post your answer here for sharing.
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1. Not sure what you’re asking.
2. 23.5 years
3. 10,900
4. No right or wrong answer, depending on a lot of factor.
Not too sure with my answers but do correct me if I go wrong.
1)I think EPF interest are compounded per annum, but I am not too sure if its simple interest.If its compound interest, even at 5%, we will get more than what we actually get in the first year in the later year, as we earn interest on the interest that we gain from the previous period. So calculating 5% at the present value of the money which we have with EPF multiply by 10 years will underestimate the true value of what we will get.
2)Will take 23.45 years assuming that the interest is compounded p.a.
3)say at r of 5%, u pay back 10500
4)Wrong, the interest charge is the same. Unless that particular bank actually charge lesser interest for short term loan.
a) the dividend rate is 5% per annum. If you are asking the total dividend we’ll get in 10 years, it is 63%.
b) 23.45 yrs
c) anything below RM10,800 is acceptable to me.
d) Wrong - normally short term loan is offered with higher interest compared to long term one.
1. 63%
2. 23.5 years
3. RM10600
4. Wrong, short term loan usually come with high interest and it’s a fix rate. It depends on how much you loan also.