MAX (not his real name) grew up, believing a credit card – or plastic money – was something he needed to be a responsible adult, so he was thrilled when his parents opened up the first credit card account for him on his final year in college.
Later, he worked as an administrative assistant in a private company and while trying to make ends meet living in the city, he quickly realised his annual RM30,000 salary alone wasn’t enough.
To make up the difference, he opened another credit card account.
Max was a compulsive shopper, buying almost anything he fancied with his credit cards.
About five years ago, he was two months behind payments for both cards. Back then, he never really had a system to keep track of and settle his bills.
As a result, interests on his credit cards jumped and his minimum payments quadrupled overnight.
After going through and totalling up his bills, the numbers gave him a rude shock — he was almost RM10,000 in debt, which, at the time, was a third of his annual gross income.
But Max was lucky — his parents were there to bail him out.
Credit card liability is a major problem and every year, millions find themselves over their heads in unpaid debts. And while credit card debts can be financially devastating, credit does have an important role in our lives.
In some cases, even renting an apartment, obtaining insurance or applying for a job may require your credit history to be pulled. Without credit, it can make even some basic things more difficult.
Once people turn 18 and can qualify for their own credit cards and loans, they become a prime target for lenders.
The real problem is that for many of these young people, this will be the first credit card they encounter. They pay little attention to interest rates, terms, and card features. The card they choose may set them up for failure right from the start.
Moreover, many young people are not adequately educated about credit cards and debts. They may know they have to pay the money back but may not understand the effect of high interest rates, minimum payments and the devastating effect that late payments can cause.
When young people have relatively low paying or part-time jobs, it can become difficult to keep up with credit card payments if they get out of control.
Are credit card debts bad?
Well, it really depends on your usage, said head of Credit Counselling and Debt Management Agency (AKPK), Sarawak Region, Marlene Margaret Nichol.
She pointed out that debts used for productive purposes brought positive results but when used for wrong reasons, for example, consumption, debts could bring negative impact on people’s lives.
“In short, a credit card is like a kitchen knife with many uses and benefits. If the knife is used wrongly, you can cut yourself.”
AKPK is a wholly owned subsidiary of Bank Negara Malaysia. Set up to proactively ensure the resilience of households, it provides an avenue for individual and potential borrowers to seek advice and assistance in managing their finances and debts.
Its mission is to promote financial wellness among Malaysians by empowering them to be financially savvy through consumer education, credit counselling and debt management programmes to enable them to regain control of their finances.
Margaret, who worked with Bank Negara before retiring, said statistics showed the second highest debts among young workers in Malaysia were from credit cards.
According to Nielson Global Survey of Investment Attitudes 2012 on Asian countries, Malaysia ranks low when it comes to paying outstanding credit card balances in full — below Indonesia, Singapore, South Korea, Japan and Taiwan.
Interestingly, the survey also reported only 18 per cent of Malaysians serviced the minimum five per cent payment every month while another 15 per cent paid more than the minimum amount.
Margaret said there are two different credit cards — for office use where one charges items used to company’s expenses and pays the outstanding balances in full when the company reimburses one’s claims. And for personal use which is paid from the holder’s salary.
One can use cards to pay monthly expenses for utilities, assessment, insurance premiums and the like.
Cards can also be used for annual payments such as membership fees and subscriptions for periodicals. That way, one can clearly account for one’s recurring expenses.
Margaret recommended using credit cards that gave rebates on purchases, saying it was like buying things with discount — another form of savings.
“Use your accumulated credit card points wisely. You can exchange them for food outlet vouchers or hypermarket shopping vouchers. Leverage on your spending.
“Unless you are eyeing a particular gift, generally, the gift may not be quite what you want and you may not want to utilise your points for it. Better to buy the specific model or item you wanted,” said the credit counsellor.
She noted that to become more debt-savvy and prudent in using credit cards, one must remember to always take time to read the fine prints in their credit card agreement and statements.
She said credit card holders must make it a practice to check their credit card statements for discrepancies or unauthorised transactions.
“Scrutinise your December credit card statements every year as card issuers are required to disclose the total credit for the year, total interest incurred, total fees and charges incurred, and table on minimum payment warning.
“So, in January next year, remember to check your December 2014 credit card statement to better understand the interest payments for your outstanding credit card balances,” she advised.
Margaret reminded card holders to pay their outstanding balances in full and enjoy an interest free period of about 20 days for all your transactions, saying if card holders only made partial payments, they would lose their interest-free period.
She warned if card holders made only minimum payment each month, that is five per cent of the outstanding balance, they would be paying more interest for a longer period.
“Always remember that paying only the minimum of five per cent of your credit card outstanding balances can result in a huge debt due to the interest chargeable and the compounding effect.
“So if one only pays the required minimum amount, be prepared that over time, you will have a huge outstanding balance.”
Margaret said credit card issuers were required by Bank Negara Malaysia to include the table on paying only the minimum amount in the December credit card statement.
She pointed out that if a card holder made only the minimum payment each period, he or she would not only pay more interest but also take longer to pay off their balance.
“For example, a card holder has an outstanding balance of RM3,000 and is required to make a minimum payment of five per cent of the outstanding amount — which is RM150 – before July 15, 2014.
“If no additional charges are made, using this card, and each month the sum of RM150 is paid, then the balance shown on this statement will be paid off in about four years eight months – plus an estimated interest of RM1,055.
“If RM200 is paid per month, the balance will be settled in one year six months and you end up paying RM424 interest, making a saving of RM631.
“Therefore, pay as much as you can, as early as possible, so that you clear your credit card debts earlier and the interest you save can be put to better use — such as retirement savings,” she explained.
Margaret advised those with overwhelming credit card debts to ask their card issuer for a waiver of interest and finance charges, and to restructure the outstanding amount into a term loan with repayment conditions they could afford.
She said one could also refer to the Self Help Guide: Debt Relief Plan of Credit Counselling and Dept Management Agency at its website www.akpk.org.my.
Alternatively, one could resort to AKPK’s debt management programme. AKPK Sarawak Region can be contacted at 082-414910.
Margaret said since its inception, some 266,450 individuals nationwide had attended counselling services with APKP, adding that from that number, 107,364 customers had applied to enrol for the Dept Management Programme.
However, she lamented that many Sarawakians were still unaware of AKPK, saying so far, only about 8,500 had attended the counselling services and about 3,000 had enrolled for the Debt Management Programme.
“AKPK’s goal is to provide a variety of educational services to help individuals take control of their finances and gain peace of mind that comes from the wise use of credit.”
She said the leading causes of debts among young Malaysians were credit cards, car loans, study loans, housing loans and personal loans.