• Guide to Understanding Credit Cards

    Credit cards are increasing in popularity and are fast becoming the preferred way of conducting financial transactions. Not only do they offer convenience of not carrying around a bulky wallet but the number of merchants, both locally and overseas that accept credit cards are ever increasing. Credit cards today have become akin to a form of currency. The biggest advantage of a Kad Kredit remains in the fact that it allows a cardholder to buy now but pay later. It is this very advantage that turns out to be a cardholder’s nemesis. Impulse purchases, needless expenses all add up and soon people find themselves being overrun with credit card debt.

    Credit cards when used effectively offer the holder a plethora of benefits and value added features. The below guide outlines the basic workings of a credit card, its various features and how to capitalise on the benefits it provides.

    Basic working of a credit card

    Credit cards in its most fundamental form is a variant of a loan which is to say that every time a person utilizes their card to purchase something, they are in effect taking out a loan from the credit card provider and using that money to purchase a particular commodity or service. When one applies for a credit card, the banks will go through the applicant’s credit history and if he meets the eligibility criteria, will provide the person with a credit card. The banks also set the credit limit and the terms for repayment based on the applicant’s credit history.

    A credit history is a historical record of a person’s credit usage. This is inclusive of loans, overdrafts, previous credit cards and whether or not the person has made timely payment of utility bills. A good credit history translates to banks offering higher credit limits and lower interest rates Credit limit is how much expenses one can charge on their card. It is basically the limit on how much one can borrow from the credit card provider. Regulations put forth by Bank Negara Malaysia state that any cardholder with an annual income of less than RM 36,000 or RM 3000 a month can have a maximum credit limit that is equivalent to times their monthly income. People who fall in this bracket are also restricted to a maximum of 2 credit cards.

    Interest rates levied on credit cards range anywhere from 8% to 15% p.a. The cards with higher interest rates often have more value added features to offset the high rate of interest. The interest rate charged on cards varies and depends on a host of factors such as credit scores and repayment behaviours. It is important to note that while making the monthly payments it is best to pay the entire amount due. However if this is not possible one should always try and pay more than the minimum amount. Paying the bare minimum results in a snowballing of the interest charged and takes that much longer to clear the debt entirely.

    Making full payments also has an added benefit of potentially lowering the interest incurred. Good paymasters receive tiered interest rates which means the better the repayment behaviour, lower are the interest rates charged.

    Types of credit cards and the benefits they offer

    Zero interest credit cards:

    These credit cards have a period that offers 0% interest. The 0% interest period will remain valid if the cardholder is able to pay back the outstanding amount within the specified time frame.

    Prepaid cards:

    These cards allow the cardholder to spend an amount equivalent to what is stored on the card. Most of the prepaid cards have no age or income requirement and are a safe method of payment while travelling of for teenagers.

    Business credit cards:

    They are those credit cards that offer business related benefits such as frequent flyer miles and financial management tools.

    Low interest credit cards:

    These are credit cards that offer low interest rates starting from 8% as compared to the standard 15% charged on most cards.

    Zero annual fee credit cards:

    These cards have no annual fees and are free for life. One should read the terms carefully as many cards are only free for the first year or will be free if a certain amount of expenses are charged to the card.

    Charge cards:

    These cards allow the cardholders to make purchases on credit. Unlike credit cards where one can make purchases and then pay through monthly instalments, charge cards require the cardholder to pay the due amount in full. Failure to repay in full results in a late payment fee whereas credit cards allow the cardholder to make minimum monthly payments if they cannot make out full payments.

    Secured Credit cards:

    These credit cards require the cardholder to put up a deposit for the credit card and have a higher rate of interest. This is a viable method of quickly improving credit scores. The deposit provides a guarantee to the card issuer that your debt would be covered. The cardholder will still have to make monthly payments on time

    Islamic banking credit cards:

    These credit cards are Shariah compliant credit cards. They often have benefits clubbed in such as reward points or complementary Takaful coverage.

    Credit cards with travel benefits:

    The benefits offered by these cards include frequent flyer miles that can be redeemed for free flight tickets, reward points for overseas expenses, complementary travel insurance, assistance in booking flights and hotels.

    Credit cards with reward points

    Most of the credit cards offer reward points. These points can be redeemed for electronic appliances and gadgets from the credit card provider’s catalogue. Some can be redeemed for shopping or dining discounts at select outlets.

    Credit cards with premium privileges:

    These benefits are usually offered by exclusive credit cards such as platinum credit cards. The benefits include access to concierge services, access to airport lounges, golf courses, discounts at hotels both locally and overseas and travel assistance anywhere in the world.

    Credit cards with Petrol Rebates:

    Certain credit cards are tailored for everyday use and as such offer attractive benefits such as cashback on petrol expenses or double the reward points for petrol expenses. The benefits provided for petrol expenses can be limited to a particular petrol brand or can be applicable to all petrol brands

    Features of credit cards

    20 day interest free period:

    Almost all credit cards are equipped with a 20 day interest free period. This period is applicable only on retail purchases provided the merchant is a participating merchant and is only on full payments before or on the due date. Any outstanding amount will incur interest.

    Supplementary cards:

    A primary cardholder can request for a supplementary card to be given to a third party nominated by them. The supplementary cardholders will receive same benefits offered to the primary cardholders and do not need an income requirement to be eligible but they do need to be 18 years of age. Any transactions made using the supplementary card are charged to the primary cardholder’s account.

    Balance transfer:

    This feature allows you to transfer outstanding dues from one credit card to the other. Doing so will enable the cardholder to make the monthly payments at 0% interest. However the cardholder needs to keep in mind that the balance transfer has a specified period ranging anywhere between 12 months to 36 months and any outstanding payments due will begin accruing interest.

    Flexi Pay Plan:

    When making retail purchases, provided the purchase is made at a participating merchant, one can convert the retail purchase into a series of instalments that charge very low to zero interest

    Cash withdrawals:

    One can utilize the credit card to withdraw cash. Withdrawal of cash incurs a fee and the cash withdrawn itself attracts a high rate of interest. The daily cash withdrawal limit for most cards is set at RM 5000.

    Eligibility Criteria for Credit Cards

    The main criteria that Banks look at are Income and Age. Income requirements vary from card t card and bank to bank. Most platinum cards and exclusive club cards require a much higher annual income to avail whereas majority of the everyday credit cards require a minimum income of RM 2000 to RM 3000 per month to avail. Bank Negara Malaysia, with effect from 2011 made it mandatory for an individual to have a monthly income of RM 2000 to avail a credit card.

    The age requirement is that a person applying for a credit card should have attained the age of 21 and the supplementary cardholder should have attained 18 years of age.

    Fees and charges

    Credit cards not only incur interest. They have additional fees that can potentially increase your debt if unaware of. The common fees and charges are annual fees, card replacement fees, supplementary statement fees, cash withdrawal fees, late payment fees, overseas transaction fees, balance transfer fees and supplementary card fees. One should also be aware of hidden charges. Many cards offer trial versions of certain services that are automatically converted into subscriptions that will have to be paid for. One should be aware of all hidden charges and choose the Kad Kredit that works best for them.

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