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Management
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
4.
X INTRODUCTION
Using your credit card wisely may be one of the most important steps you can
take towards keeping your financial health in check. A credit card is like a
kitchen knife. It has many benefits, but if used wrongly, you can cut yourself. To
manage your credit card well, you must understand and monitor your credit
statements, correct errors when appropriate, and also recognise how finance
charges are computed. You should avoid all fees, including finance charges,
which means paying your balance in full every month.
TOPIC 9
9.1
W 145
The most popular form of open account credit is the bank credit card issued by
commercial banks and financial institutions. Examples of these cards are
MasterCard and Visa. They are accepted by a wide variety of merchants. Credit
card companies set credit limits that vary among individuals. Individuals who
are just beginning to establish their credit history will have low credit limits. As
these individuals prove their credit worthiness, these credit limits are usually
increased.
While many credit card companies charge an annual fee, many companies will
waive the fee for individuals who use their cards frequently and pay their bills
on time. Credit cards have grace periods during which individuals are not
charged interest on their purchases. Many cards also offer cash advances through
automated teller machines. Interest rates may vary widely among different cards.
In choosing a card, individuals should consider the cards acceptance by
merchants, the annual fee, the interest rate and the maximum credit limit.
Figure 9.1 shows a few samples of credit cards issued by different banks.
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TOPIC 9
ACTIVITY 9.1
1.
2.
9.2
The credit card issued to you will come with a line of credit called a credit limit,
which is predetermined by the card issuer. When you use the card, the credit
card issuer will first pay the merchant on your behalf and bill you later.
Generally, if you have paid the full amount of your previous months retail
transactions, you are given an interest free period of between 20 and 50 days
from the date of your purchases to settle the outstanding amount. If you opt to
pay the partial or minimum payment, finance charges on your unpaid retail
transactions will be imposed and this is calculated from the day the transactions
are posted to your account.
SELF-CHECK 9.1
1.
2.
3.
9.3
There are many other types of cards which serve different purposes such as the
following:
(a)
Charge Card
A charge card is a specific kind of credit card. A credit card allows you to
make a minimum payment when you receive your monthly statement, a
charge card does not. The balance on a charge card account is payable in
full when the statement is received and cannot be rolled over from one
billing cycle to the next.
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W 147
In short, you must pay the total amount due in full each month; failing
which, late payment charges will be imposed. American Express and
Diners Club are two well-known organisations that offer charge cards.
(b)
Debit Card
A debit card (also known as a bank card or check card) is a plastic payment
card provides the cardholder electronic access to his or her bank account(s)
at a financial institution. The card, where accepted, can be used instead of
cash when making purchases. Figure 9.2 shows some sample Visa debit
cards.
Like a credit card, the debit card is a cashless payment tool that can be used
to pay for products and services. However, unlike credit and charge cards,
the amount you spend on your debit card will immediately be deducted
from your bank account, instead of your paying the money back at a later
date. With a debit card, you can only spend up to what is available in your
account.
In many countries, the use of debit cards has become so widespread that
their volume has overtaken or entirely replaced cheques and, in some
instances, cash transactions. The development of debit cards, unlike credit
cards and charge cards, has generally been country specific resulting in a
number of different systems around the world, which were often
incompatible. Since the mid-2000s, a number of initiatives have allowed
debit cards issued in one country to be used in other countries and allowed
their use for internet and phone purchases.
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TOPIC 9
Debit cards usually also allow for instant withdrawal of cash, acting as the
ATM for withdrawing cash. Merchants may also offer cash back facilities to
customers, where a customer can withdraw cash along with their purchase.
If you find that you are the type that always pays the minimum amount on
your credit card, it is advisable that you switch to a debit card instead.
(c)
Prepaid Card
Can be used to make purchases with a spending limit equivalent to the
amount of money you place on the card. This card is similar to a prepaid
phone card or a Touch n Go card where you have a fixed amount of
money you can spend. When the amount placed on the card gets low, you
can reload the amount.
SELF-CHECK 9.2
1.
2.
9.4
A credit card can be a useful payment instrument if you know how to use it
wisely. Some of the advantages of a credit card are as follows:
(a)
(b)
(c)
You will receive monthly statements. From the statement, it shows the
billing cycle and payment due dates, interest rate, minimum payment, and
all account activity during the current period. The statements will assist
you in tracking your spending for budgeting purposes;
(d)
Some credit cards provide free personal accident and travel insurance
coverage. Credit cardholders are partially protected;
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(e)
(f)
Credit card holders can earn loyalty points which can be redeemed for
goods and/or services. Redeeming is convenient as most supermarkets and
outlets allow cardholders to redeem the points in their outlets;
(g)
(h)
Credit cards allow you the opportunity to buy needed items before an
anticipated price increase takes place.
A credit card can be a bad payment instrument if you do not know how to use it
wisely. Some of the disadvantages of a credit card are as follows:
(a)
(b)
Paperwork You will need to save your receipts and check them against
your statement each month. This is a good way to ensure that you
havent been overcharged. Should there be any errors, you will need
time to contact the issuers and this can be a great hassle if the services
from the issuers are slow and inefficient;
(c)
(d)
No free lunch The high interest rates and annual fees associated with
credit cards often outweigh the benefits received. Savings offered by
credit cards can often be obtained elsewhere; and
(e)
Deepening your debt Consumers are using credit more than ever
before. If you charge freely, you may quickly find yourself in over your
head as your balance increases, so do your monthly minimum
payments.
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TOPIC 9
SELF-CHECK 9.3
1.
2.
9.5
Before using your credit card, you should first understand some of the terms and
conditions outlined in the following:
(a)
Credit Limit
This is the maximum amount of credit that you can charge to your credit
card. Once you hit the limit, you will not be able to use your credit card
unless you pay off some of the outstanding balance.
Generally, the credit card limit given is two to three times of your monthly
income. If you use your credit card up to this limit, you are effectively
spending at least two to three months of your income in advance!
(b)
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Description
Joining fee
Some credit card issuers impose a one-time joining fee. This fee varies
depending on the card issuer.
Annual fee
This is a fee which you pay annually once you have accepted the credit
card. However, some card issuers may waive this fee if you meet certain
usage conditions.
Finance
charges
Interest
Charges
Up to 13.5%
per annum
Up to 16% per
annum
Others
Up to 17.5%
per annum
Cash
advance fee
This is a fee charged for cash advance transactions and it ranges from 3%
to 5% of the total cash advanced from your credit card account. This fee
is in addition to the finance charges imposed on the amount of advance
given to you.
Late
payment
charge
This charge is imposed when you fail to pay the minimum monthly
payment by the due date. If you pay after the due date, you will be
charged both the finance charges (the interest on your outstanding
balance) and the late payment charges.
Service tax
152 X
(c)
TOPIC 9
If you make partial or minimum payment of the amount due, you will be
charged interest for all purchases made from the day the transactions are
posted to your account.
The statement above means that if you do not make the full payment on
your credit card bill for a particular month and carry forward the balance to
the following month, the interest free period would not be applicable.
Interest charges would be imposed on your next transaction and
compounded on a daily basis until you settle your outstanding balance in
full.
(d)
(ii)
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For example, some of these conditions may state that you can only make
the minimum payment of 5% of the amount transferred during the
promotion period and that you cannot pay more or settle the amount
earlier. In addition, there would be a lock-in period barring you from
transferring your balance to another bank without first paying a penalty.
Moreover, if you opt for a balance transfer and use the credit card from
which you have transferred the balance, you could incur more expenses
than you can manage if you are not prudent with your spending.
You also have to make sure that you keep to the repayment amount and
schedule agreed upon. If you are unable to, then the promotional rates
would revert to the normal rate of 17.5% p.a. along with other late payment
charges and penalties. This is also applicable to flexi-payment instalment
schemes.
(e)
(f)
SELF-CHECK 9.4
1.
2.
154 X
9.6
TOPIC 9
If you make only the minimum payments on your credit card outstanding, you
will end up paying more money to the card issuer as compared to the original
amount you paid for the products or services due to compound interest.
Table 9.2 provides an illustration of the repayment period and the total interest
charged if you pay only the minimum monthly payment of 5% each month.
Table 9.2: Repayment Period and Total Interest Charged
for Monthly Payment of 5%
Outstanding amounts
Interest rate (per annum)
Years to pay off
Total interest charged
RM1,000
RM5,000
RM10,000
17.5%
17.5%
17.5%
5.8
7.3
RM191
RM1,838
RM3,897
Based on Table 9.2, you can observe that if your outstanding balance is
RM10,000, it will take you about 7.3 years to settle your total debt. You would
have also paid RM13,897 for what was initially only RM10,000.
Now, read the following story of two friends who had different financial
management habits.
Th
he Tale of Two Spenders and the LCD TV
Mohan saves 10% of his net income every month, while his close friend Rohan
is a compulsive spender and does not have any savings. Both Mohan and
Rohan were in the hypermarket to buy an LCD-screen television which cost
RM3,000.
Mohan used his savings to buy the television and paid cash. Rohan, on the
other hand, bought the television using his credit card which has an annual
interest rate of 17.5%. As Rohan only paid the minimum payment due on his
credit card every month for the purchase, it took him four and a half years to
pay off the balance.
While Mohan paid only RM3,000 for his TV, Rohan ended up paying the cost of
the television plus interest charges totalling to RM4,014. Rohan did not only
pay an extra RM1,014 due to the interest from making only the minimum
payment on his credit card, he also lost the opportunity to invest RM1,014 in
building his wealth.
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SELF-CHECK 9.5
Describe how to avoid the credit trap.
9.7
Shop around for the best deal. Look for waivers on joining and annual fees;
(b)
Limit the number of credit cards you carry based on your needs and
payment capability (recommended a maximum of two cards only);
(c)
(d)
Pay before the due date to avoid late payment and penalty charges;
(e)
Pay the amount due in full when you get your monthly statements to avoid
interest charges. Know the consequences of paying only the minimum
amount;
(f)
If you have a cash flow problem, pay the minimum amount for a start and
work towards paying the full amount as soon as possible;
(g)
Avoid using your credit card if you cannot make the monthly payments;
(h)
Do not use your credit card to get cash advances from an ATM. Remember,
each time you use your credit card to withdraw money, you are increasing
your loan commitments in addition to paying upfront withdrawal charges
and daily interest;
(i)
Keep your credit card receipts. Always check your credit card monthly
statements to ensure proper transactions and charges are recorded. These
statements will detail all your transactions, including fees and charges,
payment due dates and the minimum payment. Call your bank if there are
discrepancies in your statements or if you have not received one. Banks
make mistakes, too!; and
(j)
Notify your bank if you move. Late fees can happen needlessly if you do
not get your bill on time because the bill was sent to wrong address.
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TOPIC 9
SELF-CHECK 9.6
1.
2.
9.8
(b)
(c)
Never, ever, give your account number to people or organisations who call
you. Do not provide your credit card details to an unknown party as they
may use it to make purchases via telephone, mail or the Internet;
(d)
Make sure you cut your expired credit card after getting a new one to
prevent it from being cloned or tampered with;
(e)
(f)
Keep all your charge slips and check them against your credit card
statement when you receive it. If you find a mistake, call or send a letter
immediately, detailing the error.
(g)
Keep your credit card in the same place in your wallet or purse so that you
will notice immediately if it is lost or stolen; and
(h)
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SELF-CHECK 9.7
1.
2.
Explain why you should not allow anyone else to use your credit
card.
9.9
Among other things, if you are declared bankrupt, you cannot do the following:
(a)
(b)
(c)
Leave the country without the courts or DGIs permission. The DGI will
hold your passport;
(d)
(e)
(f)
(g)
A bankrupt can work but he or she has to leave a certain percentage of his or her
income to the DGI to repay debts. A person can be discharged from
bankruptcy when he or she has settled his or her debts in full.
The sensible way to avoid becoming a bankrupt is to pay your credit card bills
fully and promptly every month upon receiving your statements.
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TOPIC 9
SELF-CHECK 9.8
Is it possible to go bankrupt if you default on your credit card? Explain.
9.10
The Central Bank of Malaysia (also known as Bank Negara Malaysia) announced
new measures on credit cards as part of its continuous efforts to inculcate sound
financial and debt management among credit card users. These measures are also
aimed to promote fair and responsible business practices by credit card issuers
with further enhancements in the cards security infrastructure.
Figure 9.3 shows the logo of the Central Bank of Malaysia.
TOPIC 9
W 159
With immediate effect, the eligibility requirements for credit cards are revised as
follows:
(a)
The minimum income eligibility for new credit card holders is set at
RM24,000 per annum;
(b)
For cardholders earning RM36,000 per annum and less, the following
would be applicable:
(i)
(ii)
Card issuers will engage with the affected cardholders to assist them in
restructuring their repayments to facilitate the smooth implementation of this
measure. In addition, cardholders can also seek the assistance of Credit
Counselling and Debt Management Agency, which is also known as Agensi
Kaunseling dan Pengurusan Kredit (AKPK), for advice on their debt
management.
9.10.1
Credit card issuers are required to adopt a fair, transparent and responsible
approach in the marketing and offering of credit cards to consumers. Issuers are
not allowed to increase cardholders credit limit without obtaining their consent.
Issuers are also not allowed to offer a credit advance in the form of cheque
payable to the cardholders unless the cardholders have requested for the credit
advance.
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TOPIC 9
9.10.2
In the effort to further enhance credit card security and to promote public
confidence in the usage of credit cards as a safe payment instrument, effective 1
January 2012, transaction alerts via Short Messaging Service (SMS) has been
implemented by card issuers for their cardholders after transactions are
performed. This will be followed by the implementation of the Personal
Identification Number (PIN) verification for all card transactions from 1 January
2015 onwards.
SELF-CHECK 9.9
Describe the new Credit Card Guidelines by Bank Negara Malaysia.
Always try to pay your credit card outstanding balance in full, and on time.
By only paying the minimum amount on your credit card, you will be paying
a high interest cost (due to the effect of compounding interest).
Read and understand the terms and conditions before using your credit card.
TOPIC 9
1.
2.
3.
4.
5.
W 161
Alternative to cash
B.
C.
D.
B.
C.
D.
B.
C.
Pay before the due date to avoid late payment and penalty charges
D.
If you pay your credit card bills after the due date, you will be charged with
____.
A.
an annual fee
B.
service charges
C.
D.
minimum charges
B.
C.
D.
Some credit card issuers introduce attractive schemes, such as zerointerest instalment schemes, flexi-pay schemes and balance transfers.
162 X
6.
7.
8.
9.
TOPIC 9
B.
C.
5% of the amount
D.
Credit card
B.
Charge card
C.
Debit card
D.
MyKad
B.
C.
D.
B.
C.
just ignore it
D.
TOPIC 9
CRE
EDIT CARD MA
ANAGEMENT
Fin
nance chargess
Averag
ge daily balance
Grrace period
Credit limit
l
Lin
ne of credit
Defaultt
Op
pen account credit
c
W 163
Credit Counselling
C
and Debt Management
M
Agency (AK
KPK). (2011). Power:
Maanaging yourr debts effect
ctively. Chaptter 3: Wise usage
u
of cred
dit card.
Ku
uala Lumpur: Credit Counsselling and Debt
D
Managem
ment Agency.
Garman,, E. T., & Forrgue, R. E. (22011). Person
nal finance (111th ed.). Masson, OH:
Sou
uth-Western Cengage
C
Learrning.
Gitman, L. J., Joehnk, M. D., & Billiingsley, R. S. (2014).
(
Person
nal financial planning
p
.
Maason, OH: Sou
uth-Western Cengage
C
Learn
ning.