Lesson 2: APR - The Real Cost of Credit Card Annual Interest Rate

Read the basic difference between APR and AER before continue reading the below.

Refer to the annual interest charges for Maybank credit cards.

Assume you are one of those who constantly spend more than you earn and frequently misses your payment, putting yourself in Tier 3 bracket of 17.5%.

Say, you have outstanding balance of RM 10,000, so you'll think (I did previously) that, even if I don't pay a single cent for the next 12 months, by the 13-th month, I would need to pay 117.5% x 10,000 = RM 11,750. Or, you think, every month, I will be charged a monthly interest of 17.5% /12 = 1.4583%

Not quite that simple. Confused? Let's solidify the concept with an example below.

Remember, you get your credit card statement monthly - your outstanding balance plus interest incurred previously will be carried forward to the subsequent month. That means, the compounding period is monthly!

Anticipating the price of goods in "n" years

Approximate this by calculating the Future Value, FV using financial calculator or excel.

Say, GSC  movie ticket at RM 10.00. Ignoring personal inflation rate, we take CPI increment of 3% per year, in 10 years.

In Excel, type "=fv(", then you will key in "0.03" for "rate", "10" for "nper" which mean n number of periods, "0" for "pmt" which stands for periodic payment, and "-10" for "[pv],  present value for which it must be negative.

You will get the answer RM 14.80. This is the expected movie ticket price in 2022 if inflation remains constant each year.