I started using a credit card when I worked in corporate. I behaved using it and ensure I pay timely or keep a reasonable balance at any time.
However, the discipline changed when I became a consultant. As my income is like a roller coaster, I turn to a credit card for emergencies or buy things that I want. Then, I racked up my credit card nearly RM 30k of debt.
When I had difficulties paying even the minimum amount, only then I know how dangerous if you don’t use your credit card wisely. My savings account was frozen by the bank.
I could not do any money transactions (even ATM withdrawal) until I pay a certain lump sum amount to them.
With all the good and bad experiences, herein I share;
How To Make Credit Card Works for you, Good Practices and Tips.
How a credit card works?
A credit card allows you to pay for things that you want to buy even if you don’t have the money. When you use a credit card, it is like you’re borrowing money from a credit card company.
Once you make a purchase, it will show and added to your total balance.Every month, you will receive a bill that listed all purchase transactions for the past 30 days.
You will be given an option to make a minimum payment ie 5% of your total balance.
Pro of credit cards;
1. Easy to carry, easy to use
A credit card is a piece of plastic of Malaysian ID size. The transaction is exact and you don’t have to deal with balance, small change, etc. Plus, you don’t have to go to ATM to withdraw cash.
2. Safer than cash
If your credit card is stolen, you can immediately cancel your card or you will get notified of any fraudulent purchases.
On the other hand, if your wallet full of cash is stolen, hardly you will get your cashback.
3. Buy now, pay later
This is very helpful if you want to purchase big value items such as furniture, electrical appliance etc.
4. Rewards and shopping discounts
Many issuers offer cash rebates, points on purchases, rewards, and exclusive shopping discounts at dining, retail.
5. Installment plan
Many credit cards offer installment plans that charges no interest up to 24 or 36 months.
Cons of credit cards;
1. High interest payment
Credit card interest rates are high, about 18 – 20%. This will make your purchase more expensive.
For example: If you buy an item value at RM 1,000 using a credit card with an 18% interest rate, and make the minimum payment each month.
You will end up paying RM 175 in interest after one year and still owe RM 946 on your purchase.
2. Temptation to overspend
When you use cash or debit card, you will feel how much your money left after paying even RM 100.
But when you use a credit card, you would not feel the same or think about paying for it. Hence the reason why many people spend more money unneeded or on expensive items when they pay with a credit card.
3. Additional fees
Besides the high interest charges, there are other fees such as annual fee, cash advance fee, late payment fee, over-limit fee, etc.
How to use credit card to your advantage
- Know your limit – In order to minimize overspend, ask your credit card company to lower down your credit limit to the amount that you can manage on monthly basis.
- Only use it to purchase high-value items – eg. furniture, flights, holidays, large one-off purchases
- Take advantage of the rewards and extra benefit
- Emergency cash – You can use it as a temporary solution to unexpected financial difficulties eg. sudden car breakdown, home major repairs
How to use credit card wisely
1. Don’t treat credit card as an income
It’s a bad idea if you use a credit card without thinking about how to pay the money back.
2. Have max 2 cards;
- For normal usage and utilities eg. insurance payment, gym subscriptions, etc
- Another one solely for emergency. Once used, ensure to zeroize the balance the soonest.
The more credit cards you have, the greater the opportunity to get into debt and difficulty managing your monthly bills.
3. Cap your credit card value.
Ideally, you should pay in full. But, if you can’t do it, try to cap at certain limit.
You set the limit at RM 3,000. So if the balance has exceeded RM 3,000, try to pay as much as you can so that the balance is reduced to the target that you set.
4. Pay more than minimum
The lower the balance that remains on your card every month, the less interest you will have to pay on the money you borrow
When Not to use your credit card
- When you cannot afford to pay the purchase in cash
- When the balance is close to the credit limit
- Big impulse purchases
Bad mistakes when use credit card;
1. Using credit card for everyday items
When you go for groceries, pump petrol or pay bill utilities, it is better to use cash or debit card. This way you are aware and more careful of your monthly expenses
2. Taking out a cash advance
A cash advance can easily get from your credit card through an ATM. However, a cash advance will usually carry a fee of 5% of your withdrawal amount or a minimum RM 15 -25.
There’s no grace period on cash advance, so interest will start accruing immediately.On top of that, you will be charged the annual interest rates at 18 – 20%.
3. Late payment
When you miss or make late payment, you incur late payment charges on your account. The charges imposed vary between banks, it’s usually a minimum of RM 10 or 1% of your total outstanding balance.
4. Keeping up with the ‘Kardashians’
Although it’s nice to see their luxury lifestyle, sometimes you don’t have to follow them. Learn to spend within your income capacity.
Below two mistakes I personally did myself;
5. Only paying minimum monthly payments.
This is one of biggest mistakes that I made when I was tight with money. The high interest of the credit card made the balance grew every month.
6. Get into ‘One Big Customer’ Trap
My second biggest mistake!
Working as a consultant is like an entrepreneur. We believe that ‘one day’ we will land a big client as our big breakthrough.
Landing a big client means I could settle all my debts.
But I forgot that I didn’t have a crystal ball that predicts when is the ‘one day’ will be. Is it 1 year, 3 years or the next many years?
I used the credit card without having a clear plan how to pay it.
Next thing I knew, I racked up my credit limit. I was charged with over-limit fees. Plus, my savings account was frozen when I could not pay the minimum payment for 2 months.
A credit card is a valuable tool and useful if you know how to use it properly. Likewise, using it irresponsibly would hurt you badly.
So, choose your action wisely.
About the Author
Khairul, is a Certified Consultant registered with Principal, founder of Khairul Abu Bakar blog site and the LinkedIn Spotlight 2019.