It is tempting. It is convenient. Almost everyone you know has one. So should you or shouldn’t you get a credit card? After all, you need an income of only RM1,500 a month to qualify for one. And as the ads want us to believe, it is no mere piece of plastic: With it you can spend freely while earning respect and envy. But ask yourself: Do I need it? And most of all, can I handle it?
And the statistics show that many could not. According to the Minister in the Prime Minister’s Department, Datuk Dr. Rais Yatim cardholders made up between 15% and 20% of the 85,402 bankrupts (The Star, 1.3.2001).
That some cardholders become bankrupts is not surprising since paying for goods or services with credit cards is painless compared to having to fork out the actual cash. Easy credit combined with slick advertisements leads cardholders to buy things which they do not really need and to live beyond their means.
Credit card debts
According to Bank Negara, there were 3.5 million credit cardholders and who spent RM12.6 billion in 2001.
That is a lot of money spent and therein lies our concern about the relationship between credit cards, indebtedness and bankruptcies.
Paying the minimum 5% on the amount owed to the bank each month is not a good idea because you will be charged interest on the remaining 95%.
For example, if you owe RM3,000 on your credit card and choose to pay only the minimum 5% each month it will take you 55 months to settle the loan and you would have paid RM974 in interest. And that’s only an one month’s bills.
Bank Negara statistics also revealed that by June 2003 total outstanding balances of six months and above had already reached RM214 million whereas in 1995 it was only 297.0 million. (It was the highest at RM417.4 million in 1998.)
It is never a good idea to use the card to get cash because it is expensive. Yet in the first three months of 2002, the amount of cash advances by cardholders was already RM505.9 million. In 1997 the amount of cash withdrawn by cardholders was highest at RM4,141.4 million.
It appears that many consumers mistake having a credit card as being equivalent to having money in the bank.
Learn more about how you can avoid costly credit card debt and why the government and banks want you to use credit cards in the CAP Guide to managing your money, THE MONEY BOOK.