CREDIT CARD: TO GET ONE OR NOT?


Deciding on getting a Credit Card soon?

You may hear that credit cards are something that consumers need to avoid because many end up in high debts. This isn’t the case because this financial tool is a good payment method if one knows how to manage their expenses and understands all the different costs that are associated with credit cards.


How Much Do You Actually Know About Credit Cards?

There are various types of credit cards with different benefits, annual payments, interest rates, credit limits and minimum monthly payments, among other things. Before venturing into applying for your credit card, you should go in with a good understanding of knowing how to manage the repayments more efficiently.


Going in With Your Eyes Wide Open

More and more Malaysians are falling into a debt trap and bankruptcies in Malaysia has been on the rise due to poor financial planning, overspending on credit cards and overall bad spending habits. If you are not aware of what you are getting into, you may be racking up more debts than you can afford. So, to be more financially sound and be able to manage debts more efficiently when using your credit card, you should take note of the following.

  • Credit limit - Most banks will charge a fee if you spend more than your credit limit. You should keep track of your spending by listing out items that you plan to spend on a monthly basis. Experts recommend keeping your overall credit card utilisation below 30%. Maintaining lower credit utilisation rates will show that you use credit responsibly and do not rely heavily on it. This could help to strengthen your credit scores.
  • Interest rates can be scary because missing one payment can increase your interest rate to the highest possible tier. This is how many people accumulate the outstanding balance when payment is not made on time. To ensure that your interest rate remains at a low percentage, make it a point to pay at least the minimum amount on time every month.
  • Late payment fees - If you miss making at least the minimum payment on your credit card by the due date, you could be subject to a late fee and it can add an extra sum to your balance. If you have late or missed payments, your credit score will be impacted.
  • Finance Charges will be imposed on the outstanding balance excluding late payment charges in your statement at the rates prescribed by Bank Negara Malaysia. One way you can avoid finance charges is to pay your outstanding balance on time every month.
  • Fees and charges are charged on an annual basis. You can get these fees waived by using your card a minimum number of times in a year. On the other hand, some cards come with zero annual fees or have their annual fees waived if you use them regularly. Speak to your bank and look at the options available.

What Should You Know About Paying the Minimum Fees Monthly?

If you make the minimum payment each month, it will take you longer to settle off your balance. Below is a scenario illustrated by Bank Negara Malaysia:

Outstanding balance RM3,000.00
Minimum payment due RM150.00
Payment Paid a minimum amount of RM150
Payment period taken to repay 4 years and 7 months
Total fee imposed on outstanding balance RM1,055
Total new amount to be settled RM4,055

Banks generally calculate the minimum monthly payment for your credit card at 5% from your outstanding balance.

The above calculation is based on an assumption of

  • A fee rate of 18% p.a.
  • No new transaction on the card
  • 30 days a month

If you continue to spend more using your credit card while making the minimum payment each month, you will end up accumulating more debts. This will impact your credit score as 42% of the Experian i-SCORE reflects your repayment history. This comprises the number and recency of missed payments.


Knowing some Pros and Cons of Credit Cards

Before applying for a credit card, it’s important to understand its advantages and disadvantages.

Pros

  • Being rewarded while you spend: Credit cards provide you extra benefits each time you spend such as cashback, reward points, and discounts. This will be rewarding when you pay in full.
  • Fast and efficient: Having a credit card enables you to pay for items faster and seamlessly, without having the need to carry cash around.
  • Buy-now-pay-later: When you decide to make an expensive purchase and need repayment assistance in the form of monthly instalments, this allows you to borrow money through your card.
  • Emergency Aid: A credit card can come in handy and to your rescue when you are out of cash or unable to use your debit card.
  • Promotes good credit score: Your credit card will help you build your credit profile only if you are a good paymaster. A good credit profile will help you obtain other loans in future.

Cons

  • Accumulating debts: Many tend to spend more than what they can afford to repay. This is when you get trapped in debts as it starts to accumulate month to month.
  • Fraud and scams: Using credit cards need certain precautions, especially when making online payments. Some tend to fall into scams when they inadvertently divulge confidential information about their credit card, hence the need to be vigilant is key each time you use your credit card.

There are ways you can prevent such occurrences from happening by using monitoring tools to monitor your credit profile and at the same time, protect your credit scores from being tarnished due to scams. You can sign up for Experian’s JagaMyID so that you have peace of mind knowing that your identity is safe and you are in control of your own credit health. To know your creditworthiness before signing up for a credit card, you can check your CCRIS statement and latest i-SCORE on your Personal Credit Report Plus (PCRP) today. You can also learn more about Experian i-SCORE at https://www.mycreditinfo.com.my/index.php/home/iscore or check out other perks during Experian’s Credit Health Month at https://www.mycreditinfo.com.my/home/chm2022.