Financial math - how Citibank overcharges

Interest rates are starting to edge up as economic conditions improve.

But even in the traditionally high-interest rate countries (like Australia and New Zealand), banks lend at around 7 to 8% currently, while in much of the world, interest rates are at, or very near, 0%.

So it's extraordinary (to me) how banks are allowed to charge such whopping amounts on credit card debt.

Here's an excerpt from Citibank Singapore's credit card fine print ("RC" stands for "Ready Credit").

I've highlighted some of the charges you'd be up for if you are (heaven forbid) just 1 day late with your payment.

Additional Information Box for Credit Card & RC

Over Limit Fee (Not applicable to Citibank Personal Business Gold Visa Card)	If the current balance exceeds your limit, an over limit fee of $40 shall be charged
CITIBANK CREDIT CARD
Repayment Grace Period	25 days from the date of statement of accounts
Interest Charges	The effective interest rate applicable will be: a) the prevailing product interest rate of 2% per month (24% per annum); or b) a promotional rate of 1.5% per month (18% per annum) which may be extended based on the good conduct of your account. Notwithstanding the above, Citibank reserves the right to cancel/vary this promotional rate at any time (including if your account becomes delinquent); or c) an interest rate of 2.25% per month (27% per annum) in the event your account is twice or more past due within the last six months. Citibank reserves the right to apply this interest rate. Your interest rate will revert to the prevailing product interest rate, as soon as your account is no longer twice or more past due within the last six months. Minimum interest charge - S$3
Cash Advance Charges	S$15 or 5% of amount drawn, whichever is higher
Late Fees	a) a fixed charge of S$50; and b) a late payment interest charge computed in a manner similar to interest charges at a rate of 0.1875%, 0.25% or 0.28125% per month based on an effective interest rate of 18%, 24% or 27% per annum respectively, as applicable on your account. The late payment interest charge will be shown in the monthly statement of account as part of the interest charge.
Minimum Payment	1% of the current balance, plus the interest charges (including interest/service charges for any recurring/instalment payments), plus late payment charge or S$50 whichever is greater, plus any overdue amount in excess of the combined credit limit (if applicable)

The kicker is they are allowed to vary the conditions as they go along.

And did you know if you have loans with other institutions, and you default with them, you can be charged a higher interest rate on this card?

The high interest rates are justified by the banks on the grounds they are lending to people who pose some risk. This is certainly the case in the US where it is still easy to get a credit card. In the Singapore case, there are income limits (normally S$30,000 per year fro locals and $60000 per year for foreigners) before you can apply for a card.

There are thousands of people in the US who are now owing more than they borrowed (using their credit cards) and the interest (and fees) are growing so fast, it's sending them bankrupt, especially as the Global Financial Crisis results in job losses.

Oh, and what was the main cause of the financial crisis? Lending money to people who couldn't afford it, and didn't understand the risks, of course.

It used to be simple. Banks could only lend to people who had the means to pay it off and could secure the loan via some mortgage (this means if you stopped paying, the banks could sell your house.) It reduced excessive and risky lending. And I doubt we'll see that situation again anytime soon.

To be fair, it's not just Citibank. All credit card providers do this because they can, giving the world a US economy with around 1 trillion in credit card debt.

Be careful what you sign.

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