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  • Tiered Interest Rates on Credit Cards

    An efficient and fair way of managing and controlling credit card debt repayments is the tiered interest rate system which was brought into force in order to deter customers from borrowing unnecessarily by swiping their cards everywhere.

    The plan was to manipulate individual interest rates based on individual repayment patterns and credit histories in order to ensure a win-win situation for the lender and borrower alike.

    What is the tiered interest rate system for credit cards in Malaysia?

    The Bank Negara Malaysia (BNM) came up with the tiered interest rate system in 2011 to make sure that Malaysian households don’t suffer with unnecessary debt that they can’t handle.

    The way it basically works is through establishing higher interest rates as penalties for those who do not establish regular prompt payments, and lower interest rates for those who do.

    A person who has a history of making regular and prompt payments will have a lower interest rate to pay off on his outstanding debt. Conversely, a person who does not honour his / her payments promptly will be charged slightly higher interest rates, to deter him / her from borrowing in the future, as the repayment history suggests that they will dishonour payments again. This works to the benefit of the bank – as they will recover their outstanding debt, and to the benefit of customers who can repay – with lower interest rates, and even to customers who cannot repay – as they will not take on debt that they can’t handle in the future.

    The reason that it is a tiered interest rate system is because customers are placed into repayment brackets (or tiers) based on their repayment history and performance with debt.

    For example, BNM uses a three-tier system, as under:

    Tier

    Prompt Payment History

    Interest Rate (per annum)

    Tier – I

    Last 12 months

    15%

    Tier – II

    10 or 11 months out of the last 12 months

    17%

    Tier – III

    Less than 10 months out of the last 12 months

    18%

    This means that:

    • If a borrower has honoured all the payments in a fashion that satisfies the requirements of the “prompt payments” of BNM for all the preceding 12 months, he / she will only be charged 15% interest.
    • If a borrower has honoured all the payments in a fashion that satisfies the requirements of the “prompt payments” of BNM for at least 10 of the preceding 12 months, he / she will be charged 17% interest.
    • If a borrower has honoured all the payments in a fashion that satisfies the requirements of the “prompt payments” of BNM for less than 10 of the preceding 12 months, he / she will be charged 18% interest.

    What constitutes a “prompt payment”?

    A prompt payment is considered as a full payment of the outstanding dues, per month, by the due date.

    A payment of the minimum amount payable, per month, by the due date is also considered to be a prompt payment. The minimum payable amount here refers to the amount mentioned in the statement as the minimum amount that is to be paid, and this can be either a percentage of the outstanding balance, or RM50, depending on your bank

    How does the tiered interest rate system work?

    Different banks have different tiers and interest rates.

    BNM has up to 4 tiers, with interest rates for the best performing tier going down as low as 8.88% (per annum).

    Maybank offers a 3 tiered system, with interest rates as follows, depending on the frequency of prompt payments and dependability of the customer: 8.88% (p.a.), 17% (p.a.), and 18% (p.a.).

    Citibank has a 4 tiered system, with interest rates as follows, depending on the frequency of prompt payments and dependability of the customer: 8.88% (p.a.), 15% (p.a.), 17% (p.a.), and 18% (p.a.). With Citibank, the 8.88% interest bracket is for those customers who have consistently (for a period of 12 consecutive months) settled over 50% of what they owed.

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