Good for budgeting, but they cannot improve credit rating.
WHILE the number of credit card loyalists far exceeds that of debit cards, there appears to be a rising trend in the usage of the latter among households in terms of card-based purchases. This could denote a growing concern about debts and compulsion to better manage finances in this current uncertain climate.
For many it may be hard to resist pulling out the plastic when cash-strapped but with credit card interest pegged at 18% a year (1.5% a month), most are beginning to turn to debit cards. As at December 2008, there were 10.3 million credit cardholders in the country with total debt of RM22.8bil. Debit cards essentially allow consumers to enjoy all the benefits of credit cards, without the typical drawbacks.
People don’t always lead perfect financial lives. If you use a credit card wisely you can reap benefits like cash back, bonus points and airline miles, and a better credit score. Use it unwisely and you could end up under a mountain of debt.
While credit cards give consumers a false sense of purchasing power, they can also ruin your credit rating if they are not used wisely.
Many people tend to overspend via their credit cards and then spend years trying to pay off the balances, ending up paying double or triple the original cost of their purchases due to the high interest.
Business development manager Liz Fernandez has taken a personal loan (which offers a lower interest rate at 0.8% per month compared with credit card rates of 10%-15% a month) to offset her three credit cards.
Having had four credit cards since 1994, she says she has never been able to pay them off. “I don’t believe in credit cards anymore. Credit cards take you down the drain,” she says, admitting that it’s not for her because it’s hard to exercise some control over her spending habits. But now, she’s ready to consider the option of a debit card.
Meanwhile, businesswoman Wong Hee Ling, who has made late payments on her credit card numerous times, says that it happens because she does not have time for trivial administration matters.
But for her, a credit card is essential if you are able to manage your finances well.
“I spend mainly on necessities. This has nothing to do with the current economic situation. I just realised how wasteful I have been,” she says.
She agrees that debit cards are a good option because “you spend what you have, which is of course better than taking a personal loan as it still means spending what you don’t have,” she says, adding that there are people who do not have credit cards because they have mismanaged credit cards before and have opted instead for a cold turkey approach.
On the other hand, Chear Weng Khet, who has five credit cards, is unfazed about the worry of overspending.
“I normally use credit cards that give cash rebates that can be used to off-set future spending,” he says, adding that the general economic condition would not affect his decision this year.
“I am not worried when I spend using my credit card because I will not use it unless I am very sure I can pay in full by the end of the month,” he says.
Chear, however, says he has put off long-term purchases or buying big ticket items for the moment.
However, as wonderful as debit cards are for budgeting and keeping your spending within limits, they cannot be used to improve your credit rating. Some things cannot be bought with a debit card. You cannot use a prepaid card to pay for subscription services, for gambling in casinos, and for travel on cruise lines and some international airlines.
Debit cards also do not have the same protection as some credit cards. For example, you cannot request a stop payment on a purchase made with a debit card in case of theft or loss.
Credit cards themselves are not evil monsters, but a failure to control mounting credit card debt can become an ugly situation.
Agensi Kaunselling dan Pengurusan Kredit (AKPK), a subsidiary of Bank Negara, says that since it was set up in April 2006, about 53,000 people have sought its assistance for counselling.
Chief executive officer Mohamed Akwal Sultan says between 2007 and 2008, there was a 67% growth in demand for its services.
“This increase may not be entirely due the current economic environment. More people come to us as they want to be guided with pre-emptive measures that will enable them to weather the challenging times,” he explains.
AKPK was set up as a pre-emptive measure to provide an avenue for individual borrowers and potential borrowers to seek advice and manage their finances, facilitate debt repayment efforts to minimise incidences of non-payments arising from poor debt management. Currently about 14,000 individuals have begun their repayment via the Debt Management Programme (DMP).
“The programme has enabled these individuals to have a more structured approach in ensuring they get back on track in terms of managing their finances better,” Akwal says.
“People’s mindset needs to change, in terms of preparing themselves rather than waiting for assistance, subsidies, etc. One can only do this with financial knowledge, hence the need for personal financial management education,” he continues.
AKPK imparts knowledge for free, via its financial education talks, briefings and financial clinics. Those interested can contact the agency on behalf of their companies or organisations.
“We do foresee an increase in people approaching us for counselling to learn to make the necessary adjustments and live frugally as well as spend prudently.”
According to MasterCard Worldwide, consumer confidence across the region has dropped seven points from six months ago, as a result of current economic volatility and the prospect of a global economic recession. Results from its survey revealed that consumers in the region are pessimistic about the six-month period ahead.
Dr Yuwa Hedrick-Wong, economic adviser to MasterCard in Asia/Pacific says: “Consumers across Asia Pacific are clearly feeling the effects of the global credit crisis. While Asian financial institutions may be less affected by the global credit crunch and the financial sector melt down, Asian markets have been just as severely impacted; and the regional powerhouses like China and India are equally affected. While the consumer confidence scores in China and India are still high, confidence levels are still much lower than they were before.”