DESPITE 3.6 million Malaysians holding over eight million credit cards in Malaysia, the inner workings of a credit card are still a mystery for some.
It is time to debunk and bust some common myths that exist around credit cards.
A credit card is not a loan. False! It may not look like it, but essentially a credit card is an unsecured loan.
You can consider a credit card a short-term, 0% interest loan on anything and everything you buy, which automatically transforms into a whopping 18% interest loan if you do not pay the amount you owe in full, each month, after the bank bills you.
Related, many people believe you start paying interest as soon as you buy something with your credit card, which is also not true.
The credit card company extends you a short credit free of charge between the day you buy a product and the day your bill with that item on it becomes due.
Only after the balance becomes due and the grace period (usually 20 days) has expired, banks will charge interest.
Retailers can set a minimum amount for credit card use. Cannot!
But this one is tricky. Obviously, credit card companies want you to use your credit card for every purchase, all those small amounts add up for them.
However, retailers are hesitant as they face additional costs for accepting a credit card payment.
Contractually, retailers in Malaysia are not allowed to either impose a minimum amount or force you to pay a surcharge or fee for credit card usage.
Unfortunately, it happens all the time and it is hard to fight it if you are set to buy something. If you are upset, you could report the retailer to the bank who owns the retailer’s credit card terminal (see logo on the terminal or on your receipt).
There is only one credit score. Nope, there are many, many more. Not only do we have CCRIS (under the purview of Bank Negara Malaysia) in Malaysia, CTOS (based on FICO), RAMCI (based on Experian) and Credit Bureau Malaysia (based on the TransUnion) are also providing credit scores.
This means there are public and private, global and local credit scores.
Each bank also uses its own proprietary scoring model to estimate the level of risk your application carries, which could include items not found in the credit scores, such as home ownership, employment status, home location and even the industry you work in.
It is financially healthy to carry a bit of balance on your credit card. Typically, 30% of your limit is suggested. You wish!
This prevalent thought helps the credit card companies to earn interest but won’t help your credit score a single bit.
Financially, the most prudent course of action is to pay your credit card balance in full, every month.
Conversely, paying your balance early, before your monthly statement is issued also doesn’t help you to boost your score.
Your spending on debit or prepaid cards is taken into account when bank’s review your applications. Wrong!
Your usage of debit or prepaid cards is not factored into any decision, whether it is approval of a new credit card or an increase in your spending limit.
Mark Reijman is co-founder and managing director of https://www.comparehero.my/ dedicated to increasing financial literacy and to help you save time and money by comparing all credit cards, personal loans and broadband plans in Malaysia.
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