Credit Cards 101

A credit card is a handy piece of plastic that allows you to make purchases on credit (like a loan), which you can then pay off at a later date. Although it has many benefits, always use your credit card responsibly to stop yourself from landing in debt.

Summary

• Credit cards are not free money
  A credit card is not free money, so you should always spend within your means (no matter what credit limit the banks give you!).
   
• Credit card interest rates are high
  Credit cards usually charge an interest of 15-18% per year! This means that if you buy things on your credit card, be sure to pay your credit card balance off each month to avoid these charges.
   
• Meet more than the minimum payments
  If you only meet the minimum payments on your credit card, you’ll end up paying A LOT in interest.
   
• Use credit cards only for short-term financing
  With such high annual interest rates, it is best to use credit cards for things you can pay-off quickly. For longer-term loans, consider a personal loan instead.
   
• Credit card debt can result in bankruptcy
  Credit card debt is the 4th largest cause of bankruptcy in Malaysia. This is why it’s important to use your credit card responsibly.

DEEP, DEEP DIVE

The pros of getting a credit card

• It allows you to spread out payments for large purchases
• A credit card allows you to make a purchase while waiting for your salary to come in
• If you pay off your credit card debt each month, you essentially get a 1-month loan that is interest free
• Getting a credit card and paying it off regularly will give you a good credit score, which will be useful for future loan applications (e.g. home loans)

? Always remember: When you buy items using a credit card, it doesn’t mean that you don’t need to pay for it, it just means that you’ll pay later!

The cons of getting a credit card

• Having a credit card could tempt you to spend more than you can afford, putting you at risk of high debt or bankruptcy
• You’ll need to pay various fees and charges for a credit card
• Credit cards generally have higher annual interest rates than personal loans. So for long term borrowing, consider a personal loan instead
• You could damage your credit score if you use your credit card irresponsibly
• It can be tempting to use your credit card for cash advances, but you’ll be charged a high fee and interest rate for this (so only use it for absolute emergencies)

When can you get a credit card?

You can get a credit card if you are at least 21 years old with an annual income of at least RM24,000.

Still,  you should only get it if you’re sure you can pay-off your credit card balance consistently.

Don’t get a credit card if you plan to buy expensive items and only meet the minimum payments, because this will lead you to uncontrollable debt.

Your credit card repayments

The minimum repayment for your credit card statement each month is either 5% of your balance, or a fixed amount given by the bank (usually RM25 or RM50).

Let’s say you got yourself a credit card and you spent RM500 on it in the first month. Your statement will look like this:

Source: Maybank

The minimum amount you need to pay is RM25 (note: for Maybank the minimum repayment is the higher of either 5% of the credit balance or RM25).

But be aware that if you only make the minimum payment, and use your card to buy other things in future months, your credit card balance will grow very quickly. As a result, the minimum payment you need to make will also grow!

For example, if your credit card balance reaches RM5,000 a few months down the road because you have been only making the minimum payment, your new minimum payment will be RM250. For later months, the minimum payment will be even more!

This will continue until you’ve paid off all your credit card debt which, depending on how much you pay each month, could take a long time.

What should you look for when choosing a credit card?

The 3 main considerations are:

1. Interest rates: The interest charged on your outstanding card balance or balance that has been carried over from the previous month

What to look out for

• Which bank has the lowest rate?
• Look out also for how the rates increase over time if you don’t make a payment on time
   

2. Annual fees: Fees that are charged every year

What to look out for

• Which credit cards have NO FEES?
• Which cards have the LOWEST FEES?
• Are there waivers or exceptions (e.g., if you spend above a specific amount)?
   

3.  Rewards and benefits: Most cards come with bonus schemes like cashback, air miles, bonus points, privileges, discounts, and more

What to look out for

Find a card that meets your needs. Some of the rewards/ benefits available include cashbacks (some are tied to specific shops), petrol benefits, travel benefits, reward points

Other considerations when choosing a credit card:

Cash withdrawal: The service to withdraw cash at an ATM using a credit card. Look out for which bank has the lowest fees and interest rate for cash withdrawals. But don’t do this unless you really need to as it’s very costly!

Easy/flexi payment plan and/or cash advance plans: Some cards offer special low interest repayment schemes for large purchases on the card (easy/flexi payment plans), and some offer a cash loan (cash advance plan) to the value of your existing card’s limit which is transferred to your savings/current account.

For these plans, look out for:

• What  the upfront fees are
• Which bank has the lowest interest rate
• What the minimum or monthly installment amount is
• What  the installment period is  (Make sure you can pay-off the loan within this period)

PRACTICAL TIPS

Use comparison sites to find the most suitable credit card for you

Here are some sites that compare credit card information in Malaysia: https://loanstreet.com.my/, https://www.gobear.com/my, https://www.comparehero.my/, https://ringgitplus.com/en/, https://www.imoney.my/

As an example, let’s look at how you can research credit cards using a website like loanstreet.com.my:

As you can see there are many options. Comparison sites will generally allow you to select the benefits you want and will then show you the best options based on your needs.

For example, if you decide to click on the ‘Citi Cash Back Card’, you will see this:

What’s shown here are the card’s key features, but you can’t just rely on this information. You need to get into the details.

Scroll down to the bottom of the page where you’ll find the fees and charges, interest rates, and minimum requirements – very important information!

You might notice the following things:

• Income requirement: E.g. RM36,000 annual income to be eligible for the card
• Annual fee: E.g. an RM120 annual fee
• Interest rate: The interest rate applied to this card depends on how you settle your payments. For example, if you’ve settled your minimum payments on time for the last 12 months, the interest rate applied would be 15%. However, if you only paid your minimum payments on time for 10 months within the last 12-month cycle, you’ll be charged an interest of 17%
• Minimum annual repayment: 5% of your outstanding balance or RM50, whichever is higher. This means that every month you’ll have to pay at least RM50 if you don’t pay off the outstanding balance on the credit card on time
• Cash withdrawal: If you withdraw cash, you’ll have to pay both a 5% fee (or RM20, depending on which is higher) and an interest of 18% per year on the withdrawal amount

? Bottom line: Don’t just look at the benefits offered by the card, but make sure you take a close look at the terms & conditions and minimum requirements attached to it as well. This stuff might sound boring, but it’s very important!

Before you apply for a credit card, go through this checklist of the do’s and don’ts

DO your research beforehand

DO try to keep a low Debt Service Ratio (DSR)
The DSR is the total payments you need to make to pay for all your loans (car loans, mortgages, etc.) per month divided by your monthly income. You should try to keep these monthly payments to below 30% of your monthly income. For example, if your income is RM2,000 a month, you should try to keep your total debt and loan payments to below RM600 each month.

DO check your credit report beforehand
You can access your credit report from CCRIS (Bank Negara) or a third-party credit rating agency like CTOS or RAM Credit Information. If your credit score is low, your application is less likely to be approved by a bank.

DO check minimum income requirements
And consider carefully whether you are able to afford the fees and charges associated with the card.

DON’T apply if you haven’t had a stable job over the last 6 months
You need to show the bank that you have a steady income so they know you’ll be able to make your payments. They won’t approve your application otherwise.

DON’T apply to many credit cards at once
Banks will know if you’ve applied for other cards, which might make it look like you’re not doing well financially. If some of your applications are denied, other banks will also notice this and be more likely to deny your application.

Use your credit card responsibly

If you do decide to get a credit card, we can’t stress this enough – use your credit card responsibly!

•      Pay more than the minimum required amount each month
•      Never miss a payment

What to do if you need help with credit card debt?

If you’re already in a lot of credit card debt and find it hard to meet the minimum payments, it’s time to get help!

Don’t wait too long, as it will become more and more difficult to manage your finances. Go to www.akpk.org.my to arrange an appointment with a financial counsellor who can help you put together a debt management plan.