Desmond Chong, Financial Education Trainer from AKPK, shared about the difference between Credit and Debt and the common sources of borrowing in the video below.

Let’s first quickly discuss the difference between credit and debt:

We’ll use the credit card as an example. Let’s say you were given a credit card with a limit of RM3000. You then spend RM1000 and charge it to your card. The RM1000 was previously unutilized credit. After spending it, it becomes utilized credit and will then become a debt.

So, before spending RM1000, you have RM3000 credit available.

After spending RM1000, you have RM2000 credit available and RM1000 in debts.

Now, we go to the rules of borrowing.

The first thing you need to keep in mind is Purpose.

Why do you want to borrow money?

If your purpose is clear, it would be easier for you to get a loan from the bank. An example of a clear purpose is: I want to buy a house or I want to buy a car.

But, if your purpose is unclear like being a fortune teller or being a forecaster, I can see the share market will go up next month, it’s not a productive purpose and it will be harder for you to get a loan from the bank.

When borrowing, always borrow from a licensed financial institution, or a cooperative, or a licensed money. So the unlicensed money lenders like Ah Long, the challenges will be a lot.

We have a meeting with Michael Chong In fact Michael Chong is also facing a lot of challenges from the unlicensed money lenders. We are also working together with gamble rehab centers they also face a lot of gamblers from the unlicensed money lenders and a lot of challenges.

Before a bank lends you money they will first look at certain financial factors. These are called Debt to Income Ratio. To computer for your debt to income ratio, take your total monthly loan repayments (credit cards, housing loan, etc) and divide it by your net monthly income, and then multiply it by 100.

Ratio = (Monthly loan repayments / Net monthly income) X 100

The general rule is that the ratio should not be more than 40%.

Here’s a case study:
En. Daud’s gross monthly income is RM3800. His total monthly loan repayment, housing, car payment, credit cards is RM2128. So, his debt to income ratio is:

= (RM2128/RM3800) X 100


The example above is based on the gross monthly income. In 2012 Bank Negara gave instructions to all other commercial banks that the calculation of debt to income ratio now must be based on net monthly income.

Watch the webinar below to find out more whether:

  • To Borrow or Not to Borrow?
  • What’s the difference of Credit Vs. Debt
  • The Golden Rules of Borrowing
  • The risk of guarantor – Types of Interest Rates


Personal finance author and trainer

    1 Response to "How to Manage Your Debts Effectively and Know Your Debt Risks"

Leave a Reply

Your email address will not be published.