Just listen to the word ‘credit card’ and all kinds of negative ideas start to play in your mind. So, how to use credit card wisely? Basically, credit financial management or the right way to use a credit card depends entirely on the individual. If you are highly disciplined, it should not be a problem. In fact, using a credit card makes purchasing goods easier and faster. However, don’t be too complacent in swiping your credit card so that you end up rolling your eyes when you receive a high monthly bill.
What Is a Credit Card?
Basically, the use of a credit card is one of the payment methods that allow users to obtain goods or services on a credit loan. Just like a personal loan, you have to pay back the financial institution that gave the loan according to the set period. If you fail to repay, you will be penalized and your name will most likely be blacklisted or declared bankrupt.
The Pros and Cons of Credit Cards: 8 Ways on How to Use Credit Card Wisely and Avoid Bankruptcy
Many young people, especially those who have just got a credit card, do not know the function or how to use a credit card correctly and wisely. This article will help you understand the advantages of using credit cards, disadvantages of credit cards and how to use credit cards wisely for your information and reference.
1. Use, Pay Back and Repeat
The use of credit cards can have a negative effect if you are not good at managing and planning your finances and emotions well when shopping. However, credit cards can make managing your finances easier if used well. You can practice the use, pay, and repeat method to ensure you stay disciplined and prevent yourself from overspending. Here’s a quick guide for your guidance:
- Use a credit card according to a set monthly or annual budget;
- Avoid using a credit card if you don’t have enough money in your savings account when buying something;
- Complete the payment in full every month, never delay the payment and leave any outstanding balance;
- Repeat this step every time you shop using the best credit card you have.
2. Offer to Pay First
Many of you may enjoy eating out, shopping or vacationing with family or friends. Take this opportunity to offer to pay the entire bill first, then they just need to transfer the money via e-Wallet or QR Pay back to your account. This way, you can enjoy a lot of reward points and cash rebates (or cashback) that can benefit you. In fact, some credit card issuing banks offer annual fee waivers if you spend more than the set annual limit.
3. Pay Bills On Time, According to the Set Period
In addition, it is recommended that you pay your credit card debt in full every month to prevent your debt from increasing. For example, you use a credit card bill of RM2,000 in May, you need to settle all the balance of this debt according to the set period. If you only pay part or the minimum rate, you will have to pay a certain rate of charge or interest. Usually, the use of credit cards is subject to the following charges:
- Participation fee. The card issuing bank usually charges a certain fee rate when you apply for a credit card, this fee rate may vary depending on the card issuing bank you choose;
- Annual fee. Some banks set an annual credit card fee that must be paid each year. Despite that, there are also cards that do not set any annual fee or are exempt from paying the annual fee if spending exceeds the set amount;
- Interest Charges. Interest rates will be charged if you fail to clear the balance after the payment deadline. In fact, this charge can also increase if you do not make the payment within the specified period. In Malaysia, credit card interest rates are usually around 13.5 to 17.5 percent per year;
- Cash Advance Fee. If you cash-out cash at an ATM through your credit card, you will be charged between three and five percent of the amount withdrawn;
- Late Payment Charges. This charge will be applied if you fail to clear the minimum payment amount before the set date. This means, not only will you be charged for the outstanding balance, but you will also be charged a late payment fee if you make a payment after the interest-free period has ended.
4. Credit Cards Should Not Be Your Source of Instant Loans
There are some credit cards that offer cash advance benefits to help cardholders get immediate financial resources. For this reason, many young people who have new credit cards, for example, abuse this facility by obtaining additional financing to help solve financial problems. Although it is not a wrong action, you are not advised to do so because credit cards offer a higher interest rate of around 18 percent per year compared to personal loans of around six to eight percent only.
5. Use 30 Percent of the Credit Card Limit
Usually, credit card limits will be offered two or three times your total monthly income. If your monthly salary is RM4,000 per month, the credit card limit is usually around RM12,000 (or more) depending on the credit card issuing bank. Despite the large credit card limit, you are advised to be careful when shopping. If necessary, only spend around 30 percent of the set limit to prevent you from incurring high debt and not being able to repay the debt according to the set schedule.
6. Limit the Number of Cards
In Malaysia, you are eligible to have as many credit cards as you need from two card issuers if your annual income is less than RM36,000 per year. However, if your annual income exceeds RM36,000, there is no limit on the number of credit cards. However, it doesn’t mean you have to have a lot of credit cards. This is because, too many credit cards can potentially damage your credit record and increase your high debt burden if not managed properly. Basically, the more credit cards you have, the higher your risk of spending over budget. You are advised to ensure that the balance of the debt is within 30 to 50 percent only to ensure that your credit record is in good condition.
7. Use Credit Cards Only for Big Expenses
You are advised to use a credit card for large expenses such as buying gadgets, electrical appliances and so on only. Even so, you need to save first and if the savings are enough, then buy using a credit card and pay as soon as possible. Don’t get used to debt because a small amount of debt if left alone can add up. In addition, if you need to pay small expenses, you are advised to use a debit card, e-Wallet application or cash. This is because, impulsive spending even if it is only RM10 or RM20 every day without realizing it can be big and potentially affect your monthly budget.
8. Use Credit Cards for Emergencies
Prepare at least one credit card to use in case of emergency such as sudden car death, medical expenses of sick child and so on. In other words, if something unexpected happens that requires high spending, you can use a credit card as a back up to help solve the problem. Even so, you are still advised to control expenses and manage your finances wisely in times of emergency to avoid spending more than you can repay.
Monitor how you spend and prepare yourself with tips and how to use credit cards wisely and safely. Spending using a credit card if not planned well can be self-inflicted. Therefore, you are advised to spend according to your means and build a healthy credit score to make it easier for you to get a home loan or car loan.
Also, if you are considering the best and comprehensive car insurance for you, visit the Qoala website for more info. Qoala is an insurance platform in Malaysia that provides various types of insurance including motorcycle insurance and home insurance with the guarantee of a fast, easy and safe process.