Topic X Credit Card

Management

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.

Describe how credit cards work;

2.

Explain the benefits and problems of using credit cards;

3.

Identify the right credit cards and their advantages and

disadvantages; and

4.

Discuss credit problems, protect against credit card fraud, and

manage growing credit card debt.

X INTRODUCTION
Using your credit card wisely may be one of the most important steps you can
take towards keeping your financial health in check. A credit card is like a
kitchen knife. It has many benefits, but if used wrongly, you can cut yourself. To
manage your credit card well, you must understand and monitor your credit
statements, correct errors when appropriate, and also recognise how finance
charges are computed. You should avoid all fees, including finance charges,
which means paying your balance in full every month.

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WHAT IS A CREDIT CARD?

Let us first look at the definition of a credit card.

A credit card is an electronic payment tool which allows you to purchase

products and services without the exchange of cash. This is possible because
you have an open account credit.
An open account credit is a form of credit extended to a customer in advance
of any transactions.

The most popular form of open account credit is the bank credit card issued by
commercial banks and financial institutions. Examples of these cards are
MasterCard and Visa. They are accepted by a wide variety of merchants. Credit
card companies set credit limits that vary among individuals. Individuals who
are just beginning to establish their credit history will have low credit limits. As
these individuals prove their credit worthiness, these credit limits are usually
increased.
While many credit card companies charge an annual fee, many companies will
waive the fee for individuals who use their cards frequently and pay their bills
on time. Credit cards have grace periods during which individuals are not
charged interest on their purchases. Many cards also offer cash advances through
automated teller machines. Interest rates may vary widely among different cards.
In choosing a card, individuals should consider the cards acceptance by
merchants, the annual fee, the interest rate and the maximum credit limit.
Figure 9.1 shows a few samples of credit cards issued by different banks.

Figure 9.1: Samples of credit cards

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ACTIVITY 9.1
1.

Go to any local banks website and explore the types of credit

cards it offers.

2.

Describe the features of credit cards.

9.2

HOW DOES IT WORK?

The credit card issued to you will come with a line of credit called a credit limit,
which is predetermined by the card issuer. When you use the card, the credit
card issuer will first pay the merchant on your behalf and bill you later.
Generally, if you have paid the full amount of your previous months retail
transactions, you are given an interest free period of between 20 and 50 days
from the date of your purchases to settle the outstanding amount. If you opt to
pay the partial or minimum payment, finance charges on your unpaid retail
transactions will be imposed and this is calculated from the day the transactions
are posted to your account.

SELF-CHECK 9.1
1.

Describe the features of credit cards.

2.

How does a credit card work?

3.

What is the effect of making only the minimum payments on your

credit card accounts?

9.3

OTHER TYPES OF CARDS

There are many other types of cards which serve different purposes such as the
following:
(a)

Charge Card
A charge card is a specific kind of credit card. A credit card allows you to
make a minimum payment when you receive your monthly statement, a
charge card does not. The balance on a charge card account is payable in
full when the statement is received and cannot be rolled over from one
billing cycle to the next.

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In short, you must pay the total amount due in full each month; failing
which, late payment charges will be imposed. American Express and
Diners Club are two well-known organisations that offer charge cards.
(b)

Debit Card
A debit card (also known as a bank card or check card) is a plastic payment
card provides the cardholder electronic access to his or her bank account(s)
at a financial institution. The card, where accepted, can be used instead of
cash when making purchases. Figure 9.2 shows some sample Visa debit
cards.

Figure 9.2: Sample Visa debit cards

Source: http://www.hsbc.com.my/1/2/personal-banking/debit-cards

Like a credit card, the debit card is a cashless payment tool that can be used
to pay for products and services. However, unlike credit and charge cards,
the amount you spend on your debit card will immediately be deducted
from your bank account, instead of your paying the money back at a later
date. With a debit card, you can only spend up to what is available in your
account.
In many countries, the use of debit cards has become so widespread that
their volume has overtaken or entirely replaced cheques and, in some
instances, cash transactions. The development of debit cards, unlike credit
cards and charge cards, has generally been country specific resulting in a
number of different systems around the world, which were often
incompatible. Since the mid-2000s, a number of initiatives have allowed
debit cards issued in one country to be used in other countries and allowed
their use for internet and phone purchases.

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Debit cards usually also allow for instant withdrawal of cash, acting as the
ATM for withdrawing cash. Merchants may also offer cash back facilities to
customers, where a customer can withdraw cash along with their purchase.
If you find that you are the type that always pays the minimum amount on
your credit card, it is advisable that you switch to a debit card instead.
(c)

Prepaid Card
Can be used to make purchases with a spending limit equivalent to the
amount of money you place on the card. This card is similar to a prepaid
phone card or a Touch n Go card where you have a fixed amount of
money you can spend. When the amount placed on the card gets low, you
can reload the amount.

SELF-CHECK 9.2
1.

What is a debit card? How does it work?

2.

Describe the differences between a credit card and a charge card.

9.4

ADVANTAGES AND DISADVANTAGES OF

A CREDIT CARD

A credit card can be a useful payment instrument if you know how to use it
wisely. Some of the advantages of a credit card are as follows:
(a)

It is a convenient and efficient mode of cashless payment, you do not need

to dig into your wallet or purse to find the correct change and there is no
need to carry large amounts of cash around;

(b)

It enables the purchase of products and services online  including airline

tickets. It saves time and cost. In addition, it provides a ready record as the
information can be saved in the computer for further reference;

(c)

You will receive monthly statements. From the statement, it shows the
billing cycle and payment due dates, interest rate, minimum payment, and
all account activity during the current period. The statements will assist
you in tracking your spending for budgeting purposes;

(d)

Some credit cards provide free personal accident and travel insurance
coverage. Credit cardholders are partially protected;

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(e)

Many credit cards offer attractive schemes, such as zero-interest instalment

plans, flexi-payment schemes and balance transfers. This helps to lessen the
burden of taking out a large sum immediately;

(f)

Credit card holders can earn loyalty points which can be redeemed for
goods and/or services. Redeeming is convenient as most supermarkets and
outlets allow cardholders to redeem the points in their outlets;

(g)

A credit card is a temporary source of emergency funds; and

(h)

Credit cards allow you the opportunity to buy needed items before an
anticipated price increase takes place.

A credit card can be a bad payment instrument if you do not know how to use it
wisely. Some of the disadvantages of a credit card are as follows:
(a)

Overuse  Revolving credit makes it easy to spend beyond your means.

The convenience of credit card payment for internet shopping, hire
purchase of for electrical goods and services, like the booking of air
tickets makes spending hassle-free. However, the convenience can be
addictive;

(b)

Paperwork  You will need to save your receipts and check them against
your statement each month. This is a good way to ensure that you
havent been overcharged. Should there be any errors, you will need
time to contact the issuers and this can be a great hassle if the services
from the issuers are slow and inefficient;

(c)

High-cost fees  Your purchase will suddenly become much more

expensive if you carry a balance or miss a payment. Late payments incur
charges from the banks;

(d)

No free lunch  The high interest rates and annual fees associated with
credit cards often outweigh the benefits received. Savings offered by
credit cards can often be obtained elsewhere; and

(e)

Deepening your debt  Consumers are using credit more than ever
before. If you charge freely, you may quickly find yourself in over your
head  as your balance increases, so do your monthly minimum
payments.

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SELF-CHECK 9.3
1.

Describe the advantages of using credit cards.

2.

What are the disadvantages of using credit cards?

9.5

WHAT TO LOOK OUT FOR IN A CARD?

Before using your credit card, you should first understand some of the terms and
conditions outlined in the following:
(a)

Credit Limit
This is the maximum amount of credit that you can charge to your credit
card. Once you hit the limit, you will not be able to use your credit card
unless you pay off some of the outstanding balance.
Generally, the credit card limit given is two to three times of your monthly
income. If you use your credit card up to this limit, you are effectively
spending at least two to three months of your income in advance!

(b)

Fees and Charges

There are various types of charges that may come with a credit card
including joining fee, annual fee and finance charges. Table 9.1 lists and
describes the different types of charges.

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Table 9.1: Types of Charges and Their Descriptions

Type of
charges

Description

Joining fee

Some credit card issuers impose a one-time joining fee. This fee varies
depending on the card issuer.

Annual fee

This is a fee which you pay annually once you have accepted the credit
card. However, some card issuers may waive this fee if you meet certain
usage conditions.

Finance
charges

These are charges imposed on the outstanding balances after the

payment due dates. Currently, cardholders who promptly settle their
dues within a specified time frame will benefit under the following
tiered charges scheme:
Repayment Track Record

Interest
Charges

Cardholders who promptly settle their minimum

payment due for 12 consecutive months

Up to 13.5%
per annum

Cardholders who promptly settle their minimum

payment due for 10 months or more in a 12-month
cycle

Up to 16% per
annum

Others

Up to 17.5%
per annum

Cash
advance fee

This is a fee charged for cash advance transactions and it ranges from 3%
to 5% of the total cash advanced from your credit card account. This fee
is in addition to the finance charges imposed on the amount of advance
given to you.

Late
payment
charge

This charge is imposed when you fail to pay the minimum monthly
payment by the due date. If you pay after the due date, you will be
charged both the finance charges (the interest on your outstanding
balance) and the late payment charges.

Service tax

Starting year 2010, a service tax of RM50 a year is imposed on a principal

cardholder and RM25 for a supplementary cardholder. This amount is
posted in the monthly statement.

Source: Credit Counselling and Debt Management Agency (AKPK)

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(c)

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Interest Free Period

You will enjoy an interest free period on the purchases made through your
credit card if you do not have unpaid payments due from the previous
billing cycle. This interest free period is usually 20 to 50 days from the
posting date of the transaction.

If you make partial or minimum payment of the amount due, you will be
charged interest for all purchases made from the day the transactions are
posted to your account.
The statement above means that if you do not make the full payment on
your credit card bill for a particular month and carry forward the balance to
the following month, the interest free period would not be applicable.
Interest charges would be imposed on your next transaction and
compounded on a daily basis until you settle your outstanding balance in
full.
(d)

Balance Transfer Facility

A balance transfer enables credit cardholders to transfer their credit card
balance (or part of) from one bank to another to save on interest charges.
Usually, banks would offer you this facility at promotional rates to
encourage you to transfer your balance. This may not be a bad idea as it
helps you save on interest charges.
However, before deciding on a balance transfer, ask yourself the following
questions:
(i)

How long does the promotional rate last?

(ii)

What is the effective rate after that promotional rate expires?

(iii) Does the promotional rate apply to new purchases as well?

(iv) Is there a balance-transfer fee?
(v)

Is there a facility cancellation or early settlement fee?

While a balance transfer may be a good strategy to reduce interest charges

on your unpaid credit card outstanding, you have to be aware of the terms
and conditions of such facilities.

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For example, some of these conditions may state that you can only make
the minimum payment of 5% of the amount transferred during the
promotion period and that you cannot pay more or settle the amount
earlier. In addition, there would be a lock-in period barring you from
transferring your balance to another bank without first paying a penalty.
Moreover, if you opt for a balance transfer and use the credit card from
which you have transferred the balance, you could incur more expenses
than you can manage if you are not prudent with your spending.
You also have to make sure that you keep to the repayment amount and
schedule agreed upon. If you are unable to, then the promotional rates
would revert to the normal rate of 17.5% p.a. along with other late payment
charges and penalties. This is also applicable to flexi-payment instalment
schemes.
(e)

Flexi-Payment/Zero-Per Cent Interest Scheme

This is a facility arranged between credit card issuers and selected
merchants where cardholders can pay for purchases made with the
merchants at no interest by instalments ranging from 3 to 24 months. This is
subject to the cardholders available credit limit at time of purchase.

(f)

Liabilities of Supplementary Cardholder

The principal cardholder is primarily held responsible to pay for the
purchases made by the supplementary cardholder. However, most credit
card issuers also hold the supplementary cardholders liable if no payments
are made.

SELF-CHECK 9.4
1.

The monthly statement is a key feature of bank and retail credit

cards. What does this statement typically disclose?

2.

What is an advance fee and when will this fee be imposed?

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9.6

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HOW TO AVOID THE CREDIT TRAP?

If you make only the minimum payments on your credit card outstanding, you
will end up paying more money to the card issuer as compared to the original
amount you paid for the products or services due to compound interest.
Table 9.2 provides an illustration of the repayment period and the total interest
charged if you pay only the minimum monthly payment of 5% each month.
Table 9.2: Repayment Period and Total Interest Charged
for Monthly Payment of 5%
Outstanding amounts
Interest rate (per annum)
Years to pay off
Total interest charged

RM1,000

RM5,000

RM10,000

17.5%

17.5%

17.5%

5.8

7.3

RM191

RM1,838

RM3,897

Based on Table 9.2, you can observe that if your outstanding balance is
RM10,000, it will take you about 7.3 years to settle your total debt. You would
have also paid RM13,897 for what was initially only RM10,000.
Now, read the following story of two friends who had different financial
management habits.
Th
he Tale of Two Spenders and the LCD TV
Mohan saves 10% of his net income every month, while his close friend Rohan
is a compulsive spender and does not have any savings. Both Mohan and
Rohan were in the hypermarket to buy an LCD-screen television which cost
RM3,000.
Mohan used his savings to buy the television and paid cash. Rohan, on the
other hand, bought the television using his credit card which has an annual
interest rate of 17.5%. As Rohan only paid the minimum payment due on his
credit card every month for the purchase, it took him four and a half years to
pay off the balance.
While Mohan paid only RM3,000 for his TV, Rohan ended up paying the cost of
the television plus interest charges totalling to RM4,014. Rohan did not only
pay an extra RM1,014 due to the interest from making only the minimum
payment on his credit card, he also lost the opportunity to invest RM1,014 in
building his wealth.

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SELF-CHECK 9.5
Describe how to avoid the credit trap.

9.7

TIPS ON WISE USE OF CREDIT CARDS

The following are some tips on using credit cards effectively:

(a)

Shop around for the best deal. Look for waivers on joining and annual fees;

(b)

Limit the number of credit cards you carry based on your needs and
payment capability (recommended a maximum of two cards only);

(c)

Shop online only with trusted websites;

(d)

Pay before the due date to avoid late payment and penalty charges;

(e)

Pay the amount due in full when you get your monthly statements to avoid
interest charges. Know the consequences of paying only the minimum
amount;

(f)

If you have a cash flow problem, pay the minimum amount for a start and
work towards paying the full amount as soon as possible;

(g)

Avoid using your credit card if you cannot make the monthly payments;

(h)

Do not use your credit card to get cash advances from an ATM. Remember,
each time you use your credit card to withdraw money, you are increasing
your loan commitments in addition to paying upfront withdrawal charges
and daily interest;

(i)

Keep your credit card receipts. Always check your credit card monthly
statements to ensure proper transactions and charges are recorded. These
statements will detail all your transactions, including fees and charges,
payment due dates and the minimum payment. Call your bank if there are
discrepancies in your statements or if you have not received one. Banks
make mistakes, too!; and

(j)

Notify your bank if you move. Late fees can happen needlessly if you do
not get your bill on time because the bill was sent to wrong address.

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SELF-CHECK 9.6
1.

Suggest how to use your credit cards wisely.

2.

Why must you keep your credit card receipts?

9.8

HOW TO PROTECT YOURSELF AGAINST

CREDIT CARD FRAUD

Among some common examples of credit card frauds are unauthorised

transactions and identity theft. Although credit card issuers are always on the
alert for fraudulent transactions and scams, you should also take the necessary
steps to minimise the risk of being an identity theft victim.
To reduce your chances of being defrauded, here are some suggestions you
should follow:
(a)

Sign your credit card immediately after receiving it;

(b)

Do not let anyone else use your credit card;

(c)

Never, ever, give your account number to people or organisations who call
you. Do not provide your credit card details to an unknown party as they
may use it to make purchases via telephone, mail or the Internet;

(d)

Make sure you cut your expired credit card after getting a new one to
prevent it from being cloned or tampered with;

(e)

Check all details on the charge slips before signing;

(f)

Keep all your charge slips and check them against your credit card
statement when you receive it. If you find a mistake, call or send a letter
immediately, detailing the error.

(g)

Keep your credit card in the same place in your wallet or purse so that you
will notice immediately if it is lost or stolen; and

(h)

Report lost/stolen cards or unauthorised transactions to your bank

immediately. If you do not report the loss, you are liable for all transactions
posted to your card until it is reported.

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SELF-CHECK 9.7
1.

Describe how to protect yourself against credit card fraud.

2.

Explain why you should not allow anyone else to use your credit
card.

9.9

WHAT HAPPENS IF YOU ARE DECLARED

BANKRUPT?

Among other things, if you are declared bankrupt, you cannot do the following:
(a)

Hold any public office without the approval of the Director-General of

Insolvency Malaysia (DGI);

(b)

Pursue and court action without the DGIs permission;

(c)

Leave the country without the courts or DGIs permission. The DGI will
hold your passport;

(d)

Be a company director or carry out your own business or be involved in the

management of a company without the courts or the DGIs approval;

(e)

Be involved in the management of a company or be an employee of a

company that is owned by your spouse or close relatives and their spouses;

(f)

Be a committee member of any registered body; and

(g)

Open a bank account without the approval of the DGI.

A bankrupt can work but he or she has to leave a certain percentage of his or her
income to the DGI to repay debts. A person can be discharged from
bankruptcy when he or she has settled his or her debts in full.
The sensible way to avoid becoming a bankrupt is to pay your credit card bills
fully and promptly every month upon receiving your statements.

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Can you Go Bankrupt if you Default on your Credit Card?

According to Malaysian law you can become a bankrupt when the outstanding
sum involved is RM30,000 (previously it was RM10,000) or more with a default
period of six months or more. Defaulting on credit card payment is one of the
ways that people becoming bankrupt.
A person who is bankrupt can only use his existing credit card up to the amount
of RM1,000. If the bankrupt individual wishes to continue using his credit card
for an amount of more than RM1,000, he must notify the issuing bank or finance
company as to the status of his bankruptcy so as to allow them to decide whether
they are prepared to continue to extend the credit to the bankrupt. If the
bankrupt fails to notify the issuing bank or finance company, he will be deemed
to have committed an offence under the Bankruptcy Act 1967.

SELF-CHECK 9.8
Is it possible to go bankrupt if you default on your credit card? Explain.

9.10

NEW CREDIT CARD GUIDELINES BY

CENTRAL BANK OF MALAYSIA

The Central Bank of Malaysia (also known as Bank Negara Malaysia) announced
new measures on credit cards as part of its continuous efforts to inculcate sound
financial and debt management among credit card users. These measures are also
aimed to promote fair and responsible business practices by credit card issuers
with further enhancements in the cards security infrastructure.
Figure 9.3 shows the logo of the Central Bank of Malaysia.

Figure 9.3: Logo of Central Bank of Malaysia

Source: http://www.bnm.gov.my

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With immediate effect, the eligibility requirements for credit cards are revised as
follows:
(a)

The minimum income eligibility for new credit card holders is set at
RM24,000 per annum;

(b)

For cardholders earning RM36,000 per annum and less, the following
would be applicable:
(i)

Cardholders can only hold credit cards from a maximum of two

issuers.
x

(ii)

Existing cardholders who currently hold credit cards from more

than two issuers are given up to the end of 2011 to select their
preferred issuers. Cardholders will also be given at least two years
to service their outstanding credit card debt for the credit cards
that have been cancelled for the purpose of meeting this
requirement.

The maximum credit limit extended to a cardholder shall not exceed

two times their monthly income per issuer.
x

For existing cardholders whose credit card outstanding balance

exceeds the maximum credit limit, a grace period of two years will
be given to them to meet with the new requirement.

Card issuers will engage with the affected cardholders to assist them in
restructuring their repayments to facilitate the smooth implementation of this
measure. In addition, cardholders can also seek the assistance of Credit
Counselling and Debt Management Agency, which is also known as Agensi
Kaunseling dan Pengurusan Kredit (AKPK), for advice on their debt
management.

9.10.1

Responsible Business Practices in Provision of

Credit Cards

Credit card issuers are required to adopt a fair, transparent and responsible
approach in the marketing and offering of credit cards to consumers. Issuers are
not allowed to increase cardholders credit limit without obtaining their consent.
Issuers are also not allowed to offer a credit advance in the form of cheque
payable to the cardholders unless the cardholders have requested for the credit
advance.

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To facilitate consumers in making comparison and informed decisions, card

issuers are required to provide a Product Disclosure Sheet that contains key
information on the cards features, fees and obligations of the cardholders.
Issuers are also required to display prominently alerts to communicate to
cardholders the implications of meeting only minimum and partial repayments.
At the end of each year, customised information on how long it will take to fully
pay off the cardholders outstanding balance and the total interest costs if the
cardholder only makes minimum repayment will be issued to each cardholder.
This has been effective for annual statements issued from December 2011.

9.10.2

Further Enhancements to Credit Card

Infrastructure Security

In the effort to further enhance credit card security and to promote public
confidence in the usage of credit cards as a safe payment instrument, effective 1
January 2012, transaction alerts via Short Messaging Service (SMS) has been
implemented by card issuers for their cardholders after transactions are
performed. This will be followed by the implementation of the Personal
Identification Number (PIN) verification for all card transactions from 1 January
2015 onwards.

SELF-CHECK 9.9
Describe the new Credit Card Guidelines by Bank Negara Malaysia.

A credit card should primarily serve as an electronic payment tool to

substitute the payments that you make with cash.

A credit card should not be used as a tool for easy credit.

Always try to pay your credit card outstanding balance in full, and on time.

By only paying the minimum amount on your credit card, you will be paying
a high interest cost (due to the effect of compounding interest).

Read and understand the terms and conditions before using your credit card.

Always safeguard your cards and check your transactions.

TOPIC 9

1.

2.

3.

4.

5.

CREDIT CARD MANAGEMENT

W 161

Which of the following are benefits of a credit card?

A.

Alternative to cash

B.

Electronic mode of payment

C.

Easy to monitor and track expenses

D.

All of the above

A cash advance is a very convenient way to obtain cash, but it should be

used ____ as it can be costly.
A.

as and when you like

B.

when you want to buy expensive items

C.

only as a last resort

D.

to pay for everything

Which of the following are tips on using a credit card wisely?

A.

Limit the number of credit cards that you have

B.

Always pay your outstanding balance in full

C.

Pay before the due date to avoid late payment and penalty charges

D.

All of the above

If you pay your credit card bills after the due date, you will be charged with
____.
A.

an annual fee

B.

service charges

C.

late payment charges

D.

minimum charges

Which statement is FALSE with regard to a credit card?

A.

It is a convenient and an efficient mode of payment.

B.

You can use the statement to track your spending.

C.

You are encouraged to make only the minimum payment.

D.

Some credit card issuers introduce attractive schemes, such as zerointerest instalment schemes, flexi-pay schemes and balance transfers.

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6.

7.

8.

9.

TOPIC 9

CREDIT CARD MANAGEMENT

Charge card users have to pay __________ stated in their monthly

statement or will be charged with a late payment fee.
A.

half the amount

B.

the full amount

C.

5% of the amount

D.

any amount affordable by you

Which card can be an ideal payment instrument for imposing financial

discipline?
A.

Credit card

B.

Charge card

C.

Debit card

D.

MyKad

To prevent fraud, you should ____________.

A.

keep your card safely

B.

never sign a blank sale or charge slip

C.

not let anyone use your card

D.

all of the above

If your cards have been stolen, you should FIRST ___________.

A.

notify your card issuer immediately

B.

make a police report

C.

just ignore it

D.

apply for a new card from another card issuer

Source: AKPK

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CRE
EDIT CARD MA
ANAGEMENT

Annuall percentage rate

r
(APR)

Fin
nance chargess

Averag
ge daily balance

Grrace period

Credit limit
l

Lin
ne of credit

Defaultt

Op
pen account credit
c

W 163

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and Debt Management
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u
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Sou
uth-Western Cengage
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Learrning.
Gitman, L. J., Joehnk, M. D., & Billiingsley, R. S. (2014).
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Person
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p
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Learn
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