Hi, my name is Steven. I have been working for 2+ years. My question is, ‘Should I apply for a credit card and what tricks are you using to reap the best from it?’
It really depends. This is because I believe, not everyone is suitable to hold onto credit cards, especially people who are prone to abuse the plastic as they aren’t financially savvy or responsible. Credit cards, if used wisely, would benefit users in their wealth building. Otherwise, it would ruthlessly ruin their financial lives.
In this article, I’ll share 5 tricks that all can use to be smart credit card users and if you can follow them, then, I think it is okay for you to have the plastics:
#1: Settle All Credit Card Bills On-Time
The key words are ‘all’ and ‘on-time’. If, in a particular month, you had used and accumulated RM 2,000 in credit card bills. You should settle all RM 2,000 in bills on-time which is before the payment due date on your credit card statement. It is not wise to settle partially or to make the minimum payment required as you will pay a high interest cost which is around 18% a year on any outstanding bills that are being carried forward to the following month.
#2: Use Below 30% of Credit Card Limit
Let’s assume that Steven earns a fixed salary of RM 4,000 a month. Generally, it is possible for Steven to apply for a credit card where the credit card limit given would be 2 or 3 times the amount of his salary. Here, let’s say, Steven was given a credit card limit of RM 12,000.
The trick is for Steven to limit his swipe to 30% or RM 3,600 from his given limit of RM 12,000. Why? This is because bankers will view him to be conservative in using credit cards and hence, profiling Steven to be a low-risk borrower. It could be very helpful to Steven if he is applying for a new loan facility, be it a car loan, a personal loan or a mortgage.
Think about it. If there is another person who has the same RM 12,000 in credit card limit and he swipes RM 8,000 or RM 10,000 a month on it regularly, would you as a loan officer working for the bank prefer to approve his loan application or Steven’s?
#3: Use it Transactionally
For instance, let’s say, Steven wants to buy a MacBook Pro that costs RM 6,000. If he has the RM 6,000 in cash set aside for his MacBook Pro, then, it is okay for Steven to make the payment of his purchase with a credit card for he would get some benefits from it which he wouldn’t otherwise get if he uses a debit card.
If Steven doesn’t have the RM 6,000 in cash, then, it is best for him to withhold, delaying the purchase of his MacBook Pro. But then, you could ask, ‘How about using the 0% interest easy payment option that enables users like Steven to pay for his MacBook Pro in 12 or 24 installments?’ This leads us to:
#4: Who Should Use the Easy Payment Option?
So, back to Steven. Let’s say, he doesn’t have the RM 6,000 in-hand and he likes to buy his MacBook Pro. Is it okay for him to buy the MacBook Pro if he is given a 0% interest easy payment option to spread out his payment to 24 instalments which amounts to RM 250 a month?
Ideally, this is okay if Steven could honor his agreement and make his payments of RM 250 per month without adding on more credit card bills onto his existing bill. But usually, this is not the case for most people. This is because credit cards offer people a chance to buy stuff without having the cash in the first place.
If Steven develops a habit of doing so, buying more stuff without having cash in hand to pay for them, he will soon be committing more credit card installments on a monthly basis. As such, it is possible for Steven to make partial payment or just the minimum payment required on his credit card bills and hence, carrying his credit card debt forward and snowball it to a bigger amount.
So, if Steven is the type that can’t control his spending habits, it would be really helpful for him to forget about the 0% interest easy payment option.
#5: What About Cash Advances?
Should I grab it? Well, let’s say, you are given RM 12,000 in cash advance from a bank for using its credit card. You can settle it in 6 equal monthly instalments of RM 2,000 a month. The only thing you need to pay is an upfront fee of 3.88% of the amount of your cash amount.
Guess what? Instead of 3.88%, if you accepted the cash advance, you are in fact borrowing RM 12,000 at an interest rate of 13.55% per annum. The bankers will indefinitely love you as a customer. Why is that so? How did you come out with the interest rate of 13.55% per annum? Well, we have a 1-Hour Webinar, which was conducted by KCLau where he demonstrated how to calculate the effective interest rate of your cash advance.
How to be a Power User of Credit Cards?
In short, if Steven is a financially responsible person, it would be okay for him in getting himself a credit card. He could use it to either enjoy some perks from all his transactions made from his credit card or to start building his credit profile.
Once you had gained some experiences from using a credit card or two, then, it is okay for you to get more credit cards and become a credit card power user. In our 1-Hour Webinar, we had revealed how you can maximize the benefits from being a power user of multiple credit cards.