Don't Leave Home Without It

According to The Association of Banks in a letter to the editor published last Saturday, credit cards in circulation have grown 278% in eight years from 2.8 million in 2000 to 10.6 million in 2008.

This showed that credit cards are accepted as a convenient electronic payment tool. As the economic condition remains unclear, stronger financial discipline has to be instilled to avoid a critical problem in the future. The most important step in responsible credit card use is to completely pay off the bill every month. Think of the credit card as using cash that is reserved each month for the items charged. With this method, no interest accrues and credit cards become legitimate and helpful financial tools.

Banks in Malaysia monitor the credit cardholders’ payment record for the 12 consecutive months to determine their repayment track record. Based on such record, one of three tier rates will apply under a unique tiered interest rate system.
With the tier rates, credit cardholders are encouraged to continuously make at least the minimum payment of 5% of the amount outstanding within the due date to stay at tier I at all times or, as the case may be, move from a lower tier to a higher to enjoy better interest rates with a steadily improving repayment track record.

About 30% of credit cardholders pay the amount outstanding in full. A large number, however, typically only pay the interest and a bare minimum amount of the principal outstanding and thus never fully repay the entire sum. (This is a very worrying statistics, meaning many are spending like the Americans!)

If a credit cardholder pays only the minimum 5% of the amount outstanding on a RM10,000 balance, with an interest rate of 18% per annum, it would take seven years and three months to pay off the amount owed, assuming no more charges are added to the card. (Wow! No wonder many are broke. Now you know why banks love this product and keep sending you pre-approved cards at your doorstep!)

Thus, educating credit cardholders as to the importance of good spending habits cannot therefore be overlooked. The following are tips to be shared for handling credit cards wisely:

> KEEP one or two cards only and use as a means of payment and not as a source of long term credit.
> CHARGE only what you can afford to pay back; avoid living beyond your means.
> SHOP around for the best interest rates, annual fees and service fees. There are a few banks offering “no frills cards” at lower interest rates. These cards do not attract the annual and joining fees nor enjoy insurance coverage and/or reward schemes.
> PAY off the debt each month, or at least pay more than the minimum if one elects to pay in installments.
> AVOID withdrawing cash advances as there are charges involved. Remember that a credit card is not the same as free money.
> IN the event of inability to settle credit card amount outstanding, do not delay approaching the bank concerned for an amicable resolution which may include restructuring of the credit card debt.