Credit cards have become an essential part of modern financial life, offering convenience, rewards, and flexibility. Most Malaysians have access to credit cards nowadays. As long as you have an income, you most probably qualify for a credit card. Credit cards are widely used for everyday transactions, large purchases, and even for building a credit history. However, like any financial tool, credit cards come with their own set of pros and cons. If its use is not controlled, you would get into financial hot water. In this article, we shall see the features of credit card.
Pros of Credit Cards
1. Convenience
One of the most significant advantages of credit cards is the convenience they offer. You can make purchases online and offline without carrying cash, and you can easily track your spending through monthly statements.
2. Rewards and Benefits
Many credit cards in Malaysia offer rewards programs, including cashback, air miles, and points that can be redeemed for goods and services. Additionally, some cards provide complimentary travel insurance, concierge services, and access to airport lounges.
3. Building Credit History
Using a credit card responsibly and making timely payments can help you build a positive credit history. This is crucial for obtaining loans, mortgages, and other financial products in the future.
4. Fraud Protection
Credit cards often come with built-in fraud protection, offering greater security compared to debit cards. If your card is lost, stolen, or used fraudulently, you can report it to the issuer and limit your liability.
5. Emergency Funds
Credit cards can act as a safety net in emergencies, providing access to funds when you need them most. This can be particularly useful for unexpected expenses or during financial difficulties. Nonetheless, this should only be used as a last resort. You should keep some cash as emergency fund.
Cons of Credit Cards
1. High Interest Rates
One of the primary drawbacks of credit cards is the high interest rates charged on outstanding balances. If you fail to pay off your balance in full each month, you could end up paying significant amounts in interest.
2. Risk of Debt
The ease of use and access to credit can lead to overspending and accumulating debt. High interest rates can make it challenging to pay off balances, leading to a cycle of debt.
3. Annual Fees
Some credit cards in Malaysia come with annual fees. While these fees can sometimes be offset by rewards and benefits, they are an additional cost to consider.
4. Late Payment Penalties
Missing credit card payments can result in late fees and penalties, which can add to the financial burden. Additionally, late payments can negatively impact your credit score.
5. Temptation to Spend
The convenience of credit cards can sometimes lead to impulsive spending. It is easy to overspend when you are not physically parting with cash, which can lead to financial difficulties.
Interest Rate on Credit Card Balance
Credit card interest rates are typically expressed as an annual percentage rate (APR). You will incur interest if you carry a balance. For simplicity, you can estimate it with the following steps:
1. Find your current APR and balance in your credit card statement.
2. Divide your current APR by 12 (for the 12 months of the year) to find your monthly periodic rate.
3. Multiply that number with the amount of your current balance.
Thus, if you do not clear off the balance, the interest can snowball to a large amount.
Tips for Managing Credit Card Interest
1. Pay Your Balance in Full
The best way to avoid paying interest is to pay off your balance in full each month. This way, you can enjoy the convenience and rewards of your credit card without incurring interest charges.
2. Understand the Grace Period
Most credit cards in Malaysia offer a grace period, typically 20-25 days, from the end of the billing cycle to the due date. Paying your balance in full within this period can help you avoid interest charges.
3. Choose a Low-Interest Card
If you anticipate carrying a balance, consider applying for a credit card with a lower interest rate. Some cards are specifically designed for low interest, although they may offer fewer rewards.
4. Take Advantage of Promotional Rates
Some credit cards offer promotional interest rates, such as 0% APR for a limited period. These can be beneficial for large purchases if you can pay off the balance before the promotional period ends.
5. Monitor Your Spending
Keep track of your credit card spending to avoid surprises. Many card issuers offer online tools and mobile apps that can help you monitor your transactions and balance.
How I Use My Credit Cards
Currently, I have three credit cards. Two cards are used for daily purchases and one card is used primarily to make purchase with instalment plan. The two cards for daily purchases have cash rebate feature, but the percentage is not high and there is a cap. I consider the rebate as a small discount on my purchases.
I always pay my balance in full to avoid the interest. Credit cards just help me to postpone the payment so that I could earn some meagre interest out of my cash. Although it is not much, I am at least getting something compared to spending the cash straightaway.
Conclusion
Credit cards in Malaysia offer numerous benefits but also come with risks. To maximise the advantages and minimise the disadvantages, it is crucial to use credit cards responsibly. This means paying off balances in full each month, avoiding late payments, and using credit within your means. By doing so, you can enjoy the benefits of credit cards without falling into the traps of debt and high interest charges. Remember, financial discipline and prudent management are key to leveraging the benefits of credit cards while avoiding their pitfalls.
Last but not least, be aware of the service tax. A RM 25 service tax is levied on each credit card by the government. Thus, the more credit cards you have, the higher the amount you have to pay.
How can a financial planner help you?
If you currently carry credit card balance, I will work with you to devise a plan to settle the outstanding amount. The balance should be cleared as soon as possible due to the high interest rate.
If you have other loans, I will make a list of your current debts and devise a debt management plan for you. As it is your own finances, you are the ultimate decision maker. Even if the plan is perfect, it would not work if you do not implement it. So, let me know your preferences and select a plan that you would implement wholeheartedly.
If you really cannot follow the plan, do not worry and let me know as soon as possible. I will come up with alternatives. Nonetheless, if you always fail to adhere to the plan, perhaps the plan needs to be overhauled. I will help you with this. I will also refer you to the appropriate party to seek help if your situation warrants it.
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Disclaimer: This post is for informational purpose only. You should use judgment and conduct due diligence before taking any action or implementing any plan suggested or recommended in this article.
