What you need to know about credit card debts

Are credit card debts bad?

Well, it really depends on your usage of credit cards. Think of credit card debts like any other debts. Debts when used for productive purposes bring positive results but when used for the wrong reasons, for example consumption, debts can bring negative impact to our lives. In short, a credit card is like a kitchen knife with many uses and benefits but if the knife is used wrongly, you can cut yourself.

Credit card is an electronic payment instrument which allows you to purchase products and services without using cash. So, same as using cash for purchases, one has to be disciplined with credit card usage.

Did you know that the second highest debts among young workers in Malaysia are from credit cards?

Here is an interesting survey feedback on loans of 1,002 respon- dents aged 18 – 35 years old:

• 51 % took car loans
• 39% possessed credit cards
• 90% had up to two credit cards
• 10% had three to six cards
• 33% took study loans
• 28.9% took housing loans
• 15% took personal loans
(Source: Survey of Financial Behav- iours & Financial Habits of Young Workers undertaken by Consumer Research & Resource Centre, Malaysia for the Central Region in July 2012).

Credit Card Repayment Behaviour
This is how Malaysians fare as compared with other Asian countries in a survey conducted by Nielsen Global Survey of Investment Attitudes 2012. Sadly, Malaysia ranks low in the list when it comes to paying credit card outstanding balances in full:

• Taiwan 89%
• Japan 87%
• South Korea 85%

• Singapore 80%
• Indonesia 59%
• Malaysia < 50%
• Vietnam 27%

Interestingly, the survey also reported that only 18% of Malaysians pay the minimum 5% payment every month whilst another 15% pay more than the minimum amount. Therefore, ask yourself which category are you in?

This article will show you how to use your credit cards wisely and pitfalls to avoid so that you can benefit from your credit card transactions.

Smart Ideas with Credit Cards
You can have two different credit cards; one for office use, where you charge items used for company’s expenses and pay it back in full when your company reimburses your claims. The other is for personal use, which is paid from your salary.

You can use your card to pay your monthly expenses, for example utilities, assessment and insurance premiums. It can also be used for annual payments such as member- ship fees and subscriptions for periodicals. That way, you can clearly account for your recurring expenses. Use credit cards that give you rebates on your purchases. It is like buying things with discount, which is another form of savings.

Use your accumulated credit card points wisely. You can exchange them for food outlet vouchers or hypermarket shopping vouchers.

Leverage on your spending. Unless you are eyeing a particular gift, generally, the gift may not be quite what you want and you may not want to utilise your points for it. Better to buy the specific model or item you wanted.

The smart practical tips below will help you become more debt-savvy and prudent in using your credit cards.

Practical Tips

1. Remember to always take time to read the fine prints in your credit card agreement and statements.
2. Make it a practice to check your credit card statements for discrepan- cies or unauthorised transactions.

3. Scrutinise your December credit card statements every year as card issuers are required to disclose the following:

• Total credit for the year
• Total Interest
• Total finance charges
• Table on minimum payment warning

So, in January next year remember to check your December 2012 credit card statement to better understand the interest payments for your outstanding credit card balances.

4. Notify your card issuer immedi- ately by telephone if you find any error or unauthorised transaction in your monthly credit card statement. You can notify your card issuer verbally and follow-up in writing as soon as possible.

5. Should you not understand any items in the monthly credit card statements, call the card issuer for clarification.

6. Pay your credit outstanding balances in full and enjoy an interest free period of about 20 days for all your transactions. However, if you only make partial payments you will lose your interest free period.

Illustration:
Below is an interesting case on making partial payments, even if the outstanding balance is only a matter of 40 sen. This partial payment resulted in the loss of interest free period.

Interest of 15% was charged on each transaction from the posting date to due date (16 February 2009) immediately following statement date (28 January 2009).

The above example shows the total charges amounting to RM92.30 for not making payments in full. The card issuer imposed interest of 15% on each transaction on a daily basis and finance charges on the total outstanding balance of RM5,452.40 even though only 40 sen remained outstanding.

7. If you made only minimum payment each month, that is, 5% of the outstanding balance, you will be paying more interest for a longer period. Always remember that paying only the minimum of 5% of your credit card outstanding balances can result in a huge debt due to the interest chargeable and its compounding effect. So, if one only pays the required minimum amount, be prepared that over time you will have a huge outstanding balance. The credit card issuers are required to include the illustration below on paying only the minimum amount in the last credit card statement of each year.

Illustration
The table below shows that paying only the required minimum of 5% of the outstanding credit card balance of RM3,000 would take four years and eight months to settle in full and incur an estimated total interest of

RM1,055. However, paying the minimum amount of RM150, the payment of another RM50, that is, RM200 would reduce the repayment period to a year and six months and RM631 savings in interest.

Pay as much as you can as early as possible so that you clear your credit card debts earlier and the interest you save can be put to better use, for example retirement savings.

So What Can You Do About Your Overwhelming Credit Card Debts?
Ask your card issuer for a waiver of interest and finance charges and restructure the outstanding amount into a term loan with repayment terms that you can afford.

You can refer to the Self Help Guide: Debt Relief Plan of Credit Counsel-

ling and Debt Management Agency/Agensi Kaunseling Dan Pengurusan Kredit (AKPK) at its website www.akpk.org.my or call its toll free no. 1800-88-2575. Be smart and disciplined in making the rescheduled payments to your card issuers.

Too Much Hassle to Do Any of the Above?
Be prepared to work hard, earn more money to pay off all interest and finance charges! Better still, try to pay your credit card outstanding balances in full and on time or use debit cards instead as payments for your transactions are deducted directly from your bank account.

Alternatively, you could resort to AKPK’s debt management programme.