By Chee Jo-Ey
EVERYONE has a credit card horror story either from personal encounters or people we know who went overboard with their spendings.
Even the wisest of us all are not immune to credit troubles. Extra charges such as the late payment charge can creep up on you if you’re not careful.
No doubt credit cards can come in handy in the face of an emergency but one small misstep (paying late by a day or two, or paying only the minimum amount when it falls due) can set you back financially.
University of Malaya department of finance and banking faculty of business and accountancy lecturer Dr Eric Koh says, “We should enlighten people that excessive credit card debts can easily multiply and cause much harm. Such debts may well start with the seemingly harmless late payments and quickly progress through numerous roll-over across several banks’ credit cards.”
Meanwhile, Manulife Investment Management (M) Bhd licensed financial planner Rajen Devadason shares,“I ended up with credit card problems twice in my life. But I was never in default and I always made sure, even back then, to pay my minimum charges early. As I ever so slowly learnt from my financial mistakes, I began to understand that some people should never own a credit card; for them using a debit card is much safer.”
“For others, though, a credit card can be useful, but only if they are used as a convenience and are never tapped into for the extended ‘credit’ portion. Every ringgit we spend on credit card interest in our lives reduces the amount of money we can use to build wealth through the compounding of our savings and investments.
“This portion of the cash management equation is truly a zero-sum game.”
There are fees and charges users need to be aware of before getting a credit card. An issuer may impose a late payment charge for payments not received after the due date.
Devadason says,” While the ostensible reason credit card issuers charge late payment penalties is to educate users, the ridiculously high level of those charges flow directly from the revenue line item of the business to the profit bottom line. Such charges can lead to rising debt levels.
“The solution, however, lies in informing the credit card-using public of the absolute importance of not merely making credit card payments on time but rather to always aim to pay those charges early.
“Banks and credit card companies will not change their ways; therefore, it is up to us, the little guys, to proactively choose to manage our monthly cash flow better so that we waste less and less money over time paying credit card interest and late fees.”
The late payment charge is only applicable to retail transactions and cash advances. The late payment charge shall be the lower of 1% of the outstanding balance or RM100. If an issuer intends to set a minimum late payment charge, it shall not exceed RM10.
A check on Public Bank’s website shows that a finance charge of 15% per annum applies to card members with prompt payments for 12 consecutive months.
In the event of a failure to make minimum payment by due date, a further charge of a minimum of RM10 or 1% of total outstanding balance as at statement date, whichever is higher, capped to a maximum of RM100, shall be debited to the card account.
“Credit card issuers make money from those who pay between the minimum monthly payment and less than the total amount outstanding. The onerously high interest charges are there for two reasons: to compensate the lenders for the proportion of credit card users who end up being deadbeats who don’t pay their bills and to accrue huge corporate profits,” says Devadason.
“As such, there is a massive misalignment between the economic interests of the card companies and those of its users. It would be far more effective for Bank Negara Malaysia to exercise moral suasion to force these companies to contribute a fraction of their obscene profits to a financial education fund that might be administered by organisations like the Financial Planning Association of Malaysia (FPAM) to educate the card using public.”
Koh says, “Ideally, we should explore ways to reduce the undesirable impact. To a bank, it is a neat sum of revenue. But a bank would also say it commensurates with the high unsecured default risk that it carries.
“In fact, some card issuers send clear and timely reminders of payment due dates via short message service (sms). This is good especially with so many things including spam messages which clamour for our attention. Perhaps, banks should encourage users to arrange for auto-debit deductions or even award some bonus points if they pay on time.”
According to a 2019 report by Bank Negara Malaysia, credit cards are the most widely used payment card in Malaysia. An average of 349 million credit card transactions were made annually over the past decade.
Requirements to be a principal cardholder is a minimum age of 21 years old and a minimum income of RM24,000 per annum.
Issuers offer credit cards to the public but education on the usage is lacking. So long you have a regular stream of income, you’re entitled to make an application for one.
“There seems to be lots of aggressive promotion of credit cards. Some may even extend to people who can’t manage their debts well. The issuers, together with the outsourced promotion firms, should adopt a more responsible promotional and marketing approach. This isn’t about selling simple one-off items such as snacks. These may well ruin a household,” Koh says. – Feb 9, 2020
