For better or worse, the credit card gets a lot of bad reputation in our modern society. We are constantly reminded with headlines such as this, this, and this. Yes, the statistics don’t lie and “death by credit cards” are real. But before you cut your plastic and throw them away, let’s take an in-depth look and determine whether you should use a credit card or not?
What is a Credit Card?
Credit cards are granted by financial institutions (banks) to the cardholder (you) for the payments of goods and services. Essentially, the banks are lending you a sum of money so you can purchase those shoes and bags that you’ve been eyeing for the last 4 months. The amount of money that you can borrow is up to your credit limit, which is set by the bank and it differs from a cardholder to another.
Sounds cool? Well, not so because you have to pay back the borrowed money within 20 days “grace period” in full to avoid being charged with interests.
In contrast, a debit card immediately transfers money directly from your bank account (current or savings) to the merchant. If you have an insufficient amount of money in your bank account, you cannot make the purchases.
Who is eligible?
To get yourself a credit card, you must be over a certain age and have a certain minimum monthly income. For example, a Maybank PETRONAS Visa Gold card requires the cardholder to be at least 21-years old and have a minimum income of RM 2,500 per month. The minimum income requirements are there to ensure the cardholder has the means to pay back the bills.
Additional cards can be added under the primary card account and they are called a supplementary credit card. Both cards are charged under the same account but the age requirements for the supplementary card are much lower at only 18-years old and with no minimum income. Hence, a supplementary card is suitable for a non-working spouse, parents or teenage children for an emergency.
Pros & Cons
Why you should use a Credit Card?
With the basics covered, let’s move on to the good stuff. Below are 7 reasons why you should give the credit card a try:
Credit cards are convenient and easier to carry around in your wallet instead of a fat stack of cash. With a single plastic card, you wield the purchasing power as high as your credit limit, which can be a good thing and/or a bad thing.
2. Easy Payment Plan (EPP)
Most credit card offers an instalment plan for big purchases with 0% interests. For example, you can split your flight ticket purchase of RM 1,200 over 6 months meaning you only have to pay RM 200 monthly for 6-months.
3. Establishing Credit History
If you are planning to buy a house or a car someday, chances are you will probably take on a bank loan. Having a good credit history will help you to get a lower interest rate and faster loan approval. You must be thinking that by not having a credit card will put you in a good spot as you have no monthly debt. It’s the opposite. With zero credit history, the bank cannot determine your ability to pay your loan properly. So, to establish a good credit history, pay your credit card bill in full, each month.
In case of a stolen credit card or fraudulent purchase made on your account, you can cancel the transaction or disable your credit card by calling the bank. They will send you a replacement card with a new account number within a week. In some cases, you also have the protection against items that you purchased but never received or damaged. You won’t get this kind of protection using a debit card or cash.
5. Transaction History
Through your monthly statement, you can track and monitor your spending without having to manually key-in into your spending tracker apps.
6. Credit Card Perks
Cashbacks, Airmiles, Reward Points and Travel Insurance are just some of the perks of a credit card. Banks are introducing better rewards and benefit to win over customers which benefitted us, the consumer. I like to use my credit card to accumulate Reward Points and redeem them for shopping and fuel vouchers. Banks are also throwing in free gift when you sign up for their cards. I’ve signed up for a card before just to get a free dashcam — and sold them a few months later for cash. I’m cheap like that.
7. Cash advance (Not advisable!)
Withdrawing cash at ATM using your credit card is called as a cash advance. But beware, a cash advance is charged with 17% interests which is not at all worth it. You should never attempt to withdraw cash advance unless in time of dire apocalyptic emergency.
Why you should not use a Credit Card?
As good as a feature credit card was, there are also drawbacks which are:
It’s easy to put off paying your bills when you have 20-days grace period. Before long, you missed paying your bills and the dreaded 18% interests charge kicks in. The debt and interests will accumulate over time, pulling you deeper and deeper into debt. At that time, you’ve been hit by the dreaded “death by credit card“.
2. Destroy Credit
Once you missed paying your bills, your credit score will be impacted. It takes time to build a good credit history but missing payments here and there can destroy that.
3. Hidden Charges and Fees
There are a few additional fees that you should understand before having a credit card. They are annual fees, late payment fees and penalty fees. It’s important to study your monthly billing statement in detail and look for the different charges.
How to use a Credit Card?
Although there are more benefits than drawbacks, the whole death by credit card risks still cannot be taken lightly. You understand yourself and your own behaviour. If you are struggling to pay your monthly bills on time, DON’T use a credit card, period. If you can keep yourself in check then you are most likely able to be disciplined with credit cards too. So, how should we use it properly without being sucked into the debt trap?
Well, a credit card is just a tool and as the cardholder, you should always be in control of its usage. Don’t incur additional expenses just because now, you have a credit card. Instead, think of how you can use the card as a replacement to pay for the things that you are already paying using cash. These could be fuel, groceries, electricity bills and internet bills.
Study and understand your billing statement. Learn to differentiate between credit limit, late payment fees and minimum payment. ALWAYS pay your statement in full each month. Pro-tip, automate your bill payments so you won’t forget to pay your bills.
Which Credit Card should I use?
Without knowing your income level and lifestyle, it is hard to recommend the perfect card for you. We all have different needs and value things differently. I like reward points and cashback while you might prefer air miles and travel insurances. There are over hundreds of different cards to choose from but there should be one that suits you.
How to start looking? As a general rule of thumb, you should at least be 21-years old and have a steady source of income. Then, try to scour the imoney database here for no annual fee card. If this is your first credit card, try to look for a card that was offered by your primary bank account.
If you still in have a dilemma on which card to choose from, let me recommend the Maybank 2 Card Gold with Amex and Visa/Mastercard. You can never go wrong with this card.
They came as 2 cards (Amex and either a Visa or Mastercard) within a single sign up. The main benefit lies on the Amex (American Express) card. You can choose not to activate the Visa/Mastercard at all, that’s what I did.
For starter, they are free for life and requires only RM 2,500 of monthly income. The benefit includes 5x Reward Points for purchases made on weekday and 5% cashback during the weekend (Amex card only). There are numerous items and cash vouchers that you can redeem with the accumulated Reward Points. There are a lot of merchants that accept Amex: Petronas, Tesco, Jaya Grocer, Uniqlo, AirAsia, TGV just to name a few. So, if you frequently shop at these places it’s a very good card to have.
Credit card is a tool. If used wisely, it can greatly enhance your life. Take it for granted and it may just ruin you.
ACTIONABLE TIPS: Go through your monthly spending and determine which of your fixed expenses can be paid using a credit card. Check out how I did my analysis for my spending last year here. Next, choose a suitable card with no annual fee and the type of benefit which suits your objective and start applying. Good luck!