Since young, my mom has allowed me the opportunity to witness her making payments and I observed that she likes using credit card to pay for them, be it the utility bills or expensive items such as mobile devices, electrical appliances and etc. On the other hand, my dad had advised me to stay away from credit card starting at the age of 18 when I started to have my own bank account and debit card. Having opposing stance on credit card has led me to beg the question, are credit cards good? Or are they bad?
I believe many of us have heard of the saying that credit card is bad as you’re using money from the future and you’d get into bad debts easily. However, after having deeper understanding of credit cards, I beg to differ and I strongly believe every tool in this world can be beneficial if it is used wisely, so does credit cards.
Debit Cards and Credit Cards
Two of the most common cards which would be carried within an adults wallet to pay for any transaction would either be a debit card or a credit card. Both of them look identical and they achieve the same goal in the short term, that is providing convenience of not having to pay with cash while paying for a huge sum.
Looks The Same, But Different
Although both these cards looks similar in terms of appearance, they are different in how they work and the impact they would generate to your financial being in the long run. Credit cards lets you spend the credit card company’s money which will have to be paid back at the end of the billing cycle, on the other hand, debit card deducts the amount directly from your account upon transaction.
Alright, so you’re still deducting money from your account by the end of the month, isn’t it still the same? Yes and no, yes that you’re deducting money from your own pocket still, but no, because it impacts your credit score. Using a debit card has no impact on your credit score because your bank account activity is not reported to the credit bureaus, while your credit card does.
Enter Credit Score
A credit score is a number between 300–850 that depicts a consumer’s creditworthiness. The higher the score, the better you as a borrower looks to potential lenders, such as banks. In other words, when you have a higher score, the bank would prefer to lend you money compared to another person who has a low score.
Source: CTOS
Why should you care? Well, as a Malaysian, I believe many of us are looking forward to purchase a home we could call our own in the future, and most of us will have to rely on a loan to help us make that dream come true. According to CTOS, a healthy credit score helps you to get a faster loan approval while saving you money on lower interest rates, which means your loan is cheaper compared to someone who doesn’t have a healthy credit score. If you’re curious how vast of an effect an additional 0.5% interest rates would have on loans, you may use housing loan calculators to understand better. You may also view the video below on reinstating the importance of credit score for loan application.
Reaping Benefits from Credit Cards
1. Building Credit Score with Credit Cards
Credit Reporting Agencies (CRA) such as CTOS and CCRIS are the ones which banks will refer to while reviewing your loan application. So how are these scores generated?
According to the pie chart above by CTOS, we can see that payment history dictates 45% of our credit score. And that’s where credit cards comes in, using a credit card allows you to create a good payment history for yourself with the condition that you pay it down each month. The result of having the discipline to do so will be reflected in your credit score once you have made on time payment for a certain duration, say 6 months. As mentioned previously, debit card does no impact on your credit score despite it being more convenient, because they don’t involve credit activity which will be reported to these CRAs. In other words, with credit cards, you create small debt history, and if you pay off these debt on time, you’re letting these CRAs see you as someone who would pay off your debt on time, someone who is trustworthy.
2. Get Rewarded for Spending
Besides just building your credit score with credit cards, why not enjoy the journey along the way while you’re at it? Credit Card companies usually attracts customers with incentives such as airline miles, hotel room rentals, gift certificates to major retailers and cash back on purchases. Credit cards have fairly low requirements nowadays, which suits those who have just started their career with requirements as simple as an annual salary of RM24k. If you’re interested to explore some cards, here are some which you could look into:
- Maybank Grab Mastercard Platinum Credit Card – Get up to 8x Grab Reward points for every RM1 you spend, suitable for avid Grab users. [Review]
- Maybank 2 Gold Cards – Up to 5% cash back during weekends.
- Public Bank Quantum Credit Cards – Up to 5% cash back.
On a side note, if you’re interested how these incentives are being paid for, feel free to watch the video below.
3. Who Doesn't Love Free Gifts?
Malaysians just love their free gifts, don’t they? Every now and then you will see banks promoting their credit cards with one time bonuses upon successful applications, be it a free luggage (my mom loves this), TnG Cash Back and many more. Are these legit? Yes they are. However, if it is too good to be true, you should read up on the terms and condition of the promotion campaign, you may find something like “FREE iPad for every 3rd approved application”, that way it is more of a lucky draw. But hey! If you win it, congrats!
Usually such promotion campaigns are done in shopping malls during pre-CoViD period, but sites such as RinggitPlus and CompareHero host some promotion campaign every now and then on their website, be on the lookout for them!
Watch Out for These Things While Applying Credit Card
Credit Cards are great and all, but there are still some things to watch out before while applying or using them:
1. Annual Fee
Credit card annual fees are a cost that your credit card companies charges you to keep the card account open. However, more cards are attracting customers with no annual fee for life or annual fee waiver with a few simple requirements. If you’re charged by the company for annual fee, try calling them up to get a waiver, they might just waive it for you.
2. Service Tax
In the case of Malaysia, for each card you’re holding, there will be a RM25 service tax to be paid every year. Waiver is not allowed for this usually.
3. Bill Cycle & Interest Rate
After having your card approved, make sure you’re aware of your billing cycle and your due date to avoid yourself accumulating interest by accident. One way credit card companies incentivize you to pay on time is charging you interest rate if you do not do so. A good rule which I have received from my friend is to use credit cards just as debit cards, make it a point to always pay the bills on time so you do not have to worry about interest rate at all. If you somehow fall into credit card debt, make it your first priority to pay them off as credit card debt are probably one of the highest interest accruing debt.
4. Credit Limit & Credit Utilization Ratio (CUR)
Credit limit is the maximum amount you’re allowed to “borrow” from credit card within the billing cycle. In the process of determining your credit score, CRAs will look at your credit utilization ratio (CUR), which is the percentage of a borrower’s total available credit limit that is currently being utilized. Ideally you would want to keep this below 30% for a healthy credit score, you may consider getting more than one credit card to increase your credit limit and decrease your CUR.
Credit Cards Are Great, If You Use Them Wisely
In a nutshell, credit cards are great if you use them responsibly and take the discipline to pay them off on time. TLDR, get a card that suits your lifestyle and financial, don’t overuse them, pay them on time and enjoy the benefits while you’re at it.
I’ve previously asked on people’s impression of credit cards and I came across someone saying credit cards tempts people to spend more, I totally agree and I truly believe discipline is needed if you want to use credit cards, if not, credit cards would use you. Credit cards are great if you understand them well, you can’t call something bad if you don’t understand it.
