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You are young, you are free and you think you are rich! With your first job, you get your first car, and your first credit card. And that was supposed to give you everything you need? Or want? Think TWICE!
The Credit Card Trap
Remember, the credit card gives you the chance to spend money you never had. It was never your money. So, you should not be spending them in the first place. Look at it as a temptation and that you need to spend only if it is absolutely necessary. Otherwise, you either do not need it or you should just leave it alone.
Tips to spend on credit cards
Credit cards are good if you need to spend in a last minute or for conveniences sake. As the rule of thumb goes, you only spend when you need to and nothing else. Here are some of the tips you must consider if you plan to have one or more credit cards.
Spend on Debit not credit
Where possible, do not start using the credit card. Instead, go for debit cards. After all, they operate the same way. Terminals that accept credit card usually accept debit cards as well. Main difference is that you are spending money you have in your bank when you use the debit card and credit card is money you don’t. This way, you don’t have to worry about payback. When you use a debit card, your transaction will only be approved if you have enough funds in your savings account. So it will be deducted accordingly.
This is a no-brainer. Credit cards have some of the highest interest rates among all loans. With 1.5% per month, it sums up to 18% per year which is a lot higher than a personal loan or any other loans for that matter. The main problem here is that when you do not pay off the full amount, the interest rates become compounded and that could spiral out of control very easily.
If you must use your credit card, look for those that give you great offers for necessities. For instance, there are credit cards that provide you rebates when you pay bills like electricity, home internet access and water, among others. This includes:
- Standard Chartered – up to 15% on cashback for autobill payment
- Hong Leong Bank – The WISE card gives you up to 10% for groceries, selected pharmacies and some dining, among others
- UOB Bank – The ONE card gives you up to RM200 per month for payment for utilities
Incentives and points
If you are not looking for rebates and such, you can check out which credit card gives you good point systems. Collecting reward points would be a great way to enjoy more savings as you can use them to redeem products, services or even offset your outstanding balance. Most, if not all banks will give you these incentives but look for those that are really lucrative, for instance:
- Maybank – if you get the Maybank 2 Gold Card, you get up to 5x Treatpoints when you use their American Express Credit Card
- UOB – The UOB One Card gives you unlimited cashback for movie tickets with GSC
- Citibank – lets you customize your categories on the type of points you like to collect
One issue that you must consider is the annual fees payment imposed on credit cards. Most credit cards have these charges which many are not aware of and end up having to pay them unexpectedly. Remember that the more prestigious your card is, the higher the annual fees would be. Here are some cards that come with free annual fees:
- RHB – The Smart Value Visa Card
- Citibank – the Cash Back Platinum card
- Standard Chartered – The JustOne Platinum MasterCard
- Maybank – Maybank 2 Gold Cards
- CIMB Bank – CIMB Tesco Platinum MasterCard
One good advice you can take from credit cards is in the credit limit. In most cases, you should get about RM5,000 for a classic card and this continues to increase when you go for Gold or Platinum cards. In most cases, the credit limit accorded to you would be higher than your monthly salary which means you are going to have more to spend than you earn in a month. To control your spending, you must ensure that you can always set the limit on how much you can have in your card and such. This is to help you to not overspend on your cards. Capping you spending means you can plan your payback better.
Settling your payments
It is good practice to always pay your credit card bills in full at the end of each month. As long as you pay your cards on time (meaning before the due date), there will be no charges incurred. This requires a lot of discipline and practice because it simply means you are trying to spend within your means and allocate a certain fund for this.
Try as hard as you can not to pay the minimum amount. If you really cannot afford it, then you should pay the minimum this month and pay more next month. A good practice for this is to pay as much as you can. 100% would be the best but if that is not possible, then go for 80 or 90% or along that quantum. At 5% of the total amount due, it might look and sound very little but when you do that, you impose a 1.8% monthly interest in the remaining 95% outstanding amount in your card.
Control and control
Whatever it is, NEVER let your credit card control your spending. You can fall into the debt-trap very easily with credit cards. When you let the credit card control your spending, it will control your life.
All credit cards give you the option of taking cash advance. This is where you use the card like an ATM. The difference is that you are taking out money from the bank which is not yours. The general practice is that there will be a 5% interest charge on the amount you withdraw from the machine and then, the standard interest rate (1.8% monthly) is applied.
Rotating your debts
Once you get into a debt situation, there is always a tendency to enter into another loan in order to cover the first debt. A lot of people fall into a situation far worse because of this. What they do is to apply for a personal loan or take another credit card and use that credit (or funds) to pay off the current one. The problem is, they continue using the now-cleared card and that means they now end up with an additional debt. Make no mistake about this. If you use one loan to cover another, you could be using another in the future to cover this one and it will just continue until you are unable to pay anything anymore.
More than 1 credit card
Always remember that the credit card offers you convenience and not for spending. Unless you are extremely good in managing your funds, then you should only hold 1 card. Otherwise, you can have an additional where the first can be used for petrol (with petrol rebates of course) and another for any emergency expenditure if required. But NEVER have more than 2 cards which you could maximize and then getting into a lot of trouble. Here’s a suggestion of you can do:
- use the Citibank Citi-Shell Card for petrol purposes. You would only use Shell petrol because it gives you up to 8% cashback when you put petrol
- UOB One card is a great option for groceries. Cap this at RM3,000. Now you cannot buy more than this amount for groceries.
- CIMB for all your general expenses including entertainment and emergency. Keep this limit at RM2,000.
This way, you can now manage your funds better. Considering you use RM300 per month for petrol and another RM500 for groceries, you can enjoy cashback and rebates from the respective banks. Your emergency credit card should be left for emergency and used only when necessary.