2020 was a challenging year for many, but undoubtedly, it also sped up the transformation of people’s spending habits, pushing all of us towards online channels. Try to recall your last online shopping experience. How did you pay? It most likely would’ve been through online banking, e-wallet or credit card. Many of us choose to pay using credit cards because of a particular bank’s promotion or to collect points.
In the mid-1970s, credit cards were first introduced in Malaysia. Since then, it has become one of the most common payment methods and the main source of short-term borrowing. With credit cards, we can buy the item now but pay for it later when it’s due. Today, with the government’s cashless society initiatives, credit cards are playing its role everywhere, and aren’t limited to just physical payments. It can be used for monthly auto-recurring bills, reloading e-wallets, signing up for an easy payment plan (EPP) and more.
It’s a reality that credit cards are a major payment method in our daily lives. However, to play well in the “game of credit cards”, we need to know the rules to abide by first.
1. What’s the “entry” fee?
There are two kinds of fees involved here.
A. Service Tax
Effective from 1 September 2018, all cardholders are required to pay an annual service tax of RM25 for each active credit card (principal card and supplementary card will be charged separately). This fee is unavoidable but some banks do offer rebates for this.
B. Annual Fee
From a personal finance perspective, you should only opt for a zero annual fee card! Unless you have strong and valid reasons, you should avoid a card that charges you hundreds or thousands of ringgit in annual fees.
2. What do you need to know about the “game”?
To avoid falling into traps, it’s better to know some jargon first.
A. Credit Limit
Treat it like a pre-agreed loan amount. This is the maximum amount that the bank grants to us for our spending. To determine the credit limit, banks usually look at two factors – our income and credit history. If we spend more than our limit (ie. breaking the rules of the game), be prepared to get a fine!
B. Minimum Payment
Ideally, you should endeavour to pay your outstanding balance in full. However, at the very least, you’re required to pay the minimum amount, which is 5% of the outstanding balance subject to a minimum of RM50. However, please take note for instalment payments like easy payment plans (EPP), the full installment amount must be paid. If you can’t pay the minimum payment before the due date, be prepared to get a fine as well.
C. Interest-Free Period
This is the tricky part. We do enjoy an interest-free period of 20 days from the statement date provided all outstanding balance is fully paid. The last day of this interest-free period is usually referred to as the due date. Many people will have a wrong perception that they will always enjoy the interest-free feature for all new purchases, even when there’s outstanding balance on their cards. However this isn’t the case. If you have any outstanding balance on your credit card, the interest-free period won’t apply to the outstanding balance as well as any new purchase.
For example, if someone has an outstanding due balance of RM1,000, and he/she makes another new purchase of RM1,000 with the same credit card, the finance charge will be calculated based on RM2,000 balance (outstanding and new purchase) instead of the previous balance due of RM1,000.
3. Are there any penalties when playing the “game”?
If you can’t play the game well, you might need to pay a penalty.
Most people know that credit cards charge high interest rates. However, between interest rate and convenience, people tend to opt for convenience first. A swipe of a card will always be the top choice compared to a loan application, which can take a few weeks to be approved!
A. Late Charge
Everyone knows credit cards work under the buy-now-pay-later mechanism. However, if we don’t make the minimum payment before the bill’s due date, a late payment will be charged. Usually, the amount will be 1% of your outstanding balance (subject to a minimum of RM10, or up to a maximum of RM100).
B. Finance Charge
If there is outstanding balance that remains unpaid on the due date, a finance charge will be applied (usually people refer to it as interest). Bank Negara Malaysia implements a tiered interest rate system for credit cards, ranging between 15% to 18% depending on your repayment track record.
C. Overlimit Fee
If you spend more than your approved limit, an overlimit fee will be charged. It varies across different banks, between RM25 to RM50 per month.
These are some of the important things you must know before you apply for or start using a credit card. It’s important to take note because misusing credit cards can lead to financial ruin. Shifting your payment pattern to cashless can be rewarding. However, it can easily lead to overspending as well. According to the Department of Insolvency, Malaysia recorded 84,805 cases of bankruptcy between 2015 and 2019, with around 10% attributed to credit card debt!
For credit card newbies, I have five important suggestions for you:
1. Apply for only one card and get used to the full credit card payment cycle before applying for a second (if required)
2. Limit your monthly credit card usage initially, then you can consider increasing later once you have proven to yourself that you can manage this well
3. If you can’t pay the full amount in cash now, don’t even think of making another purchase with your credit card
4. Check your credit card statement every month to review your “swiping pattern” and ensure there’s no fraud / unauthorised transactions
5. Never pay the minimum amount for the month; full payment is a must by each due date.
Financial literacy is not just about knowing about financial matters. Acquiring and consuming knowledge is easy in the internet era, but behaviour and habits are what counts. A credit card is a good financial tool if you use it wisely. Be responsible for your personal finance today as financial planning starts from small baby steps. If you need a professional to assist you along the journey, consider engaging a licensed financial planner to keep you on the straight and narrow path towards financial freedom.
About the author
Ocean Pon is a Licensed Financial Planner and likes to help millennials make wiser financial decisions to achieve financial independence. He can be contacted at email@example.com