Published by:

Agensi Kaunseling dan Pengurusan Kredit Aras 8, Maju Junction Mall 1001, Jalan Sultan Ismail 50250 Kuala Lumpur Fax : 03-2616 7601 E-mail: enquiry@akpk.org.my AKPK First Edition 2011 The copyright of this book belongs to Agensi Kaunseling dan Pengurusan Kredit (AKPK). This book or parts thereof, may be reproduced, translated, or transmitted in any form with prior written permission from AKPK only for the sole purpose of education. No monetary gain in any form should be made or derived, whether direct or indirect from such reproduction.

ISBN 978-983-44004-2-2

Disclaimer: The information contained in this book is solely for educational purpose. It is not intended as a substitute for any advice you may receive from a professional financial advisor. Agensi Kaunseling dan Pengurusan Kredit (AKPK) disclaims all and any liability to any person using the information in this book as a basis for making or taking an action. While all efforts have been made to make the information contained in this book accurate, AKPK seeks your understanding for any errors or omission. The names and details of individuals in the real life cases have been changed to protect their identities.

Chapter

WisE UsagE OF CREDit CaRD

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. In the previous chapter, we discussed borrowing. Now let us apply this knowledge when using a credit card.

What is a CREDit CaRD?

A Credit Card is an electronic payment tool which allows you to purchase products and services without the exchange of cash

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, you are given between 20 to 50 days interest free period from the date of your purchases to settle the outstanding amount.

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Benefits of a credit card

A credit card can be a useful payment instrument if you know how to use it wisely. Some of the benefits of a credit card are as follows: It is a convenient and efficient mode of cashless payment Enables purchase of products and services online including airline tickets The statements will assist you to track your spending for budgeting purposes Some credit cards provide free personal accident and travel insurance coverages Attractive schemes, such as zero-interest installment plan, flexi-payment scheme and balance transfer Earn loyalty points to enable you to redeem goods and/or services

What tO LOOK OUt FOR in a CREDit CaRD?

Before using your credit card, you should first understand some of the terms and conditions outlined below. 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 2 to 3 times of your monthly income. If you use your credit card up to this limit, you are effectively spending at least 2 to 3 months of your income in advance!
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Fees and charges

There are various types of charges that may come with a credit card including joining fee, annual fee and finance charges. Joining fee Some credit card issuers impose a onetime joining fee. This fee varies depending on the card issuer 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 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 Cardholders who promptly settle their minimum payment due for 12 consecutive months Cardholders who promptly settle their minimum payment due for 10 months or more in a 12-month cycle Others interest Charges Up to 13.5% per annum

Annual fee

Finance charges

Up to 16% per annum

Up to 17.5% per annum

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Cash advance fee

This is a fee charged for cash advance transaction 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 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 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

late payment charge

service tax

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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

This 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.

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.

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However, before deciding on a balance transfer, ask yourself the following questions: How long does the promotional rate last? What is the effective rate after that promotional rate expires? Does the promotional rate apply to new purchases as well? Is there a balance-transfer fee? 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. 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 installment schemes.

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Flexi-payment / Zero-percent interest scheme

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

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.

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. Here is an illustration of the repayment period and the total interest charged if you pay only the minimum monthly payment of 5% each month.

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Outstanding amounts Interest rate (p.a.) Years to pay off Total interest charged

RM1,000 17.5% 2.0 RM191

RM5,000 17.5% 5.8 RM1,838

RM10,000 17.5% 7.3 RM3,897

From the chart above 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.

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the 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 costs 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 4 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 totaling 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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tiPs

On WisE UsE OF CREDit CaRDs

Shop around for the best deal. Look for waivers on joining and annual fees Limit the number of credit cards you carry based on your needs and payment capability (recommended a maximum of two cards only) Shop online only with trusted websites Pay before the due date to avoid late payment and penalty charges 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 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 Avoid using your credit card if you cannot make the monthly payments 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 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
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hOW tO PROtECt yOURsELF against CREDit CaRD FRaUD

Among some common examples of credit card frauds are unauthorized transactions and identity thefts. Although credit card issuers are always on the alert for fraudulent transactions and scams, you should also take the necessary steps to minimize the risk of being an identity theft victim.

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guide

on safeguarding your credit card

Sign your credit card immediately after receiving it Do not let anyone else use your credit card 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 Make sure you cut your expired credit card after getting a new one to prevent it from being cloned or tampered with Check all details on the charge slips before signing Keep all your charge slips and check it against your credit card statement when you receive it 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 Report lost, stolen cards or unauthorized 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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OthER tyPEs OF CaRDs

Charge card Similar to a credit card. While a credit card allows you to make a minimum payment when you receive your monthly statement, a charge card does not. With a charge card, you must pay the total amount due in full each month; failing which, late payment charges will be imposed Like a credit card, the debit card is a cashless payment tool that can be used to pay for products and services. The amount you spend on your debit card will immediately be deducted from your bank account. With a debit card you can only spend up to what is available in your account If you find that you are the type that always pays the minimum amount on your credit card, we advise that you switch to a debit card instead 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

Debit card

With this knowledge, we hope that you have a better understanding of what to look out for when signing up for a credit card and how to subsequently use it wisely.
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takeaways
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 in full on time By only paying the minimum amount on your credit card, you will be paying a high interest cost (due to compounding effect) Read and understand the terms and conditions before using your credit card Always safeguard your cards and check your transactions

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Checklist
Do you know which interest tier of the credit card you fall in? How many credit cards do you have? Do you know your total credit limit? If you are not paying the full amount monthly, do you know the real cost of your purchase?

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sELF assEssMEnt
1. 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 2. 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 3. 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 4. 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
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5.

Which statement is FALSE with regards to a credit card: a. b. c. d. It is a convenient and an efficient mode of payment You can use the statement to track your spending You are encouraged to make only the minimum payment Some credit card issuers introduce attractive schemes, such as zero-interest installment scheme, flexi-pay scheme and balance transfer

6.

Charge card users have to pay __________ stated in their monthly statement or will be charged with a late payment fee. a. b. c. d. half the amount the full amount 5% of the amount any amount affordable by you

7.

Which card can be an ideal payment instrument for imposing financial discipline? a. b. c. d. Credit card Charge card Debit card MyKad

8.

To prevent fraud, you should ____________ a. b. c. d. keep your card safely never sign a blank sale or charge slip not let anyone use your card all of the above

9.

If your cards have been stolen, you should FIRST ___________ a. b. c. d. notify your card issuer immediately make a police report just ignore it apply for a new card from another card issuer

Check your answers at the end of this book

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