Credit cards have been around for a long long time. Yet, surprisingly, many people still do not understand how credit cards and credit work. In a very simple sense, when you buy a product, the company that gave you the credit card (usually a bank) will pay for you so that you get to enjoy the goods and services instantly, then you would have to pay them back. We've heard good things and plenty of bad things about credit cards, but if you were ever hesitant about getting one, here are 6 myths about credit cards you should know first!
1. I Don't Need A Credit Card, Ever
There's cash, there are debit cards (you pay with the money you have in your bank account), and now there are e-wallets. It's not wrong to think that you might never need a credit card, so why bother applying? One of the few reasons is that credit cards allow you to purchase big ticket items, items prized at hundreds and thousands of ringgit without needing you to fork out the money right now. Moreover, at times of emergencies, you might suddenly need a huge amount of cash, and no matter how much gold, stocks, or properties you have, these things are just not cash and cannot be liquidated at a moment's notice.
Not only that, applying for credit cards, using them, and paying them off in full every month actually helps with a credit score. A credit score is a scoring system that banks use to determine how trustworthy you are in order to approve a loan for a car or a house. It is a known fact that there are high income people who get rejected for loans just because they do not have any credit history, even though they are perfectly capable of repaying the loan.
2. Credit Cards Are Only For Rich People
The first ever credit cards were mailed to random people, regardless of their income. Although the benchmark today is a little higher, it is still not impossible for a fresh graduate with incomes as low as RM2400 a month to get approved for a credit card. The catch here would be the credit limit granted to you, as the higher your income, the more credit (maximum amount you can spend) you'll get. There are tons of credit cards out there so all you have to do is to filter them based on minimum required income and select one that is best for you.
3. Credit Cards Are Free
Yes, there are credit cards that are entirely free, especially ones that are tailored to lower income groups, but most other credit cards have an annual fee. This annual fee can go from under RM50 up to a couple hundred ringgits for the higher end cards. Some cards, however, offer to waive that fee provided you fulfill certain conditions, which for the most parts, involve spending a certain amount in a year. Do also take note that every credit card you own will be charged a RM25 sales and service tax every year which is usually unavoidable.
4. All Credit Cards Are Bad News
Credit cards are like fire, they're good if you use them correctly, but can literally ruin lives when it gets out of hand. The thing to remember here is if you don't want it to go out of control, only buy something you actually have the cash for. Otherwise, you'll face the son of the devil himself - interest, and that's a disaster waiting to happen. If, on the other hand, you always pay off your credit card balance every month, you will not only be building your credit score, but also enjoying perks such as cashbacks (literally free money), air miles for travel, or merchant discounts!
5. Credit Cards Helps Me Buy Things I Can't Afford
As mentioned above, you should only buy what you can definitely pay off. Many people end up in huge piles of credit card debt because they think a credit card is an excuse not to budget. When they swipe their card, they don't feel that they are spending their own money, and thus tend to overspend. Remember, the credit card should be a tool you take advantage of, not the other way round. Always live below your means.
(READ: 6 Steps To Make A Monthly Budget)
6. I Only Need To Pay The Minimum Balance
Another reason why many people end up under mountains of debt is because they only pay the minimum amount required stated in their credit card bills. While this does keep you from losing your credit card, you will have to start paying interest on the remaining amount. What's even worse is that this interest will add on to the amount owed in the following month and more interest will be accrued on that! It's a debt snowball and it will crush you. Yes, you'll pay off that RM5000 TV eventually, but that's after 5 years and after paying an extra 1000 or 2000 of interest for nothing!
(READ: How To Pay Off All Your Debt)
So, the jury's still out on whether credit cards are good or bad for the economy. As for our personal finances, it is always good to keep a fire going for warmth (having a credit card) but if you get burnt (credit card debts), then the only person you can blame is yourself.
To discover all the different offerings of credit cards and see which one fits you best, you can head over to comparison websites such as RinggitPlus or CompareHero, where they also provide you simple ways of signing up for a card.
