Credit Card, A Monster or A Friend?

"I don't want a credit card, I can't control myself spending"

"Credit card is dangerous because it makes me want to spend more without knowing it"

"I prefer to know how much I spend"

Whenever people talked about credit card, you can always hear about people whining about how bad and disadvantageous to have a credit card because people said they just can't control their impulsive shopping behavior.

The minimum requirement to apply for any credit card in Malaysia:

1. At least three full months working (EPF recorded)
2. Minimum salary of RM 2,000

 I graduated last December, and started my corporate career life at January. Like everyone else, I am eligible to apply for a credit card and hence writing this blog to actually understand and share my perspective towards having a credit card. Is credit card a monster, or a friend?

Credit card allow you to pay everything on a "credit", which means you temporarily borrow money from your card issuer with a maximum card limit which is set depending on your income and banks' confidence toward you repaying your debt. There are many different type of credit cards in the market, which are (credit to comparehero.my):

Pros

1. Cash Flow

The most important benefit that credit card provide is CASH FLOW. If you are running any business, you know the importance of cash flow. Say you earn an income of RM5,000 and you have a debt obligation of RM3k, you are basically left with RM2k to spend with. In case of any emergency, you would have left with not enough funds because most of your funds are used to pay your debt. Credit card provide you with an additional flexibility to defer your payment or make them into installments.

 The best thing is, if you pay your credit bill timely every month, there is NO interest charge. Meaning that you can borrow the RM3,000 basically with no interest at all, and the extra RM3,000 you can easily utilize it to be placed in somewhere else (either taking educational lessons, entertainment and more).

Almost all installments needs a credit card. You can have more cash in your accounts in case of emergency and buy the items that you want by paying installments. Of course you will need to control your debt-to-salary level. My preference debt level is lower than 50% of your net income.

2. Ease Loan Approval

If you need to apply loan like mortgage or car loan (to buy houses, car) in the future and do not have any credit history, loan application is likely to be harder because bankers do not have know whether you could repay your loan effectively. In other words, not having a credit card might affect your credit score and affect your loan application.

Having a credit card with a good repayment history increase your credit rating because bankers can easily check your credit rating through your CCRIS and CTOS rating. 

3. Cash Saving and Benefits

Imagine doing the same thing every month and you get rewards and money just by switching your form of payment. All you have to do is paying it with credit card instead of cash. As mentioned above, there are many types of credit cards available but the most common credit cards are cashback and rewards credit card. If you have shown a good repayment history for years, these credit card issuers might even loan you a RM20k with NO interest as a reward of your loyalty! Even placing the RM20k in FD would earn you a sweet RM600 per year, for FREE!

Wait, isn't that too good to be true? How do these issuers make money then? Loaning us money with no interest at all.. giving free gifts.. must be a scam right?

 Lets look at how credit card issuers make money:

1) Interest

When you overdue your payment, credit card issue interest charge between 5% to 15%.

2) Fees

They also make money by charging annual fees, balance transfer, advanced fees.

For the first two, most of the credit card DON'T charge you any interest fee if you pay your last monthly bill in full. They also provide annual fee waivers for new users. In short, those are fees that are not imposed on you.  They make most of their money from the third revenue source:

3) Interchange

Interchange is a transaction fee charged on merchants when you are paying your bills using your credit card. 1% to 3% of the total fee are taken as "commission" to be paid to the credit card issuers. You don't need to pay extra, the fees are charged on the sellers. So basically you are getting those rewards and cashback because the merchants paid for it! 

4. Cashless spending

Obviously with a credit card you don't need to get to ATM that often. Its also safer to not carry that much cash around. And the best thing is, you can cancel it anytime you want as long as no balance is unpaid. However according to experian.com,  it's best to keep unused credit cards open so that you benefit from a longer average credit history and a larger amount of available credit. Credit scoring models reward you for having long-standing credit accounts, and for using only a small portion of your credit limit. 

Cons

1. Too easy to spend

This is the most obvious reason people don't wanna get their credit cards. Even if they do, they kept it in their drawers or hidden somewhere so they don't see it and use it.  

2. Late interest fees

If you paid everything on time, Yes you don't get charged any fees but if you're late you will be charged a hefty interest rate on what you spend. And it is not in small amount, some charges up to 5%-15% on your late payment.

3. Destroyed credit rating

If you are failed to pay your bills too many times, you could easily spoil your credit rating, destroying your future loan application chances or even declare bankruptcy. 

___________________________________________________________________________________________

Final Thoughts

There is always a good and bad side for everything. Key to everything is to have the ability to manage your money. Credit card can be a monster, or a friend depending on how you use it. It is important to be responsible towards how you spend your money and you should never be too afraid to use a credit card just because of the cons that I mentioned above. Managing your money effectively is the least that you need to master if you are even trying to improve your life quality.

Thank you! 

Disclaimer: The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry.