The Things about Credit Card

People loves it, People hates it.

If you ever can't withstand the temptation of impulsive purchasing, STAY AWAY from credit cards. They're evil, at least to YOU.

Let me start with explaining something about credit card.

First and foremost, it is a card, obviously. It maybe square, round, or any other wicked shapes, but still it is a card.

Then, there is something tricky about the word "credit".

Credit is all around us.

You got yourself some credit hours when you scored an A in one of your A-level subject. Corporations got themselves credit-rated by rating agency based on some evaluation criteria. You put in one buck into a slot machine to buy some credits naively hope to won that jumbo jackpot. Then we have credit spread, credit crisis, credit limit, letter of credits, credit entry, blah blah blah.

Similarly, credit cards deal with credit and particularly your credibility in making repayments.

A simple formula illustrates the idea:

Your Value to Bank = Your Real Value + Your Credit Value

This explains why bank want to give you a credit limit higher than your monthly income. If credit limit is at the indiviual real value, basically it is relatively risk free in the sense that the repayment ability is almost guaranteed. The bank can't charge you 18% (In Malaysia) for that! And the demand for credit card would probably decreased significantly.

Risk and Return thingy is here again.

Bank is charging you 18% stated annual interest rate because of the chances that you default is very high. In market, this rate is even higher to lots of junk (BB or below) bonds out there.

Ok, so that is from the bank perspective.

Now, from your perspective as credit borrower (credit card holder).

The important question to answer: Is you as risky as the bank said?

Rule of thumb 1: If your net cash flow* is positive after putting in your credit card debt into the calculator, then most probably the bank is overcharging you for the actual level of default risk you at.

* Simple Net Cash Flow is just your monthly income minus all your expenses.

Rule of thumb 2: If the credit card limit is covered&, again the bank is overcharging you.

& Covered means you have cash or liquidable assets to use for sudden total repayment.

Rule of thumb 3: In the event of impulsive/seasonal purchases, rule 1 and 2 should not be broken.

Basically if the above 3 golden rules are maintained at all costs, then you have no worry becoming a card slave (or i prefer to call them bank slaves)


And if you are so kind and concern about bank profitability when everybody is clearing their card debt every month. No worry, the bank won't go bankrupt. At a minumum the gross revenue of bank will still consists of card merchant charges.

Think of credit card as a cash flow management instrument, but not a debt instrument.

If your lifestyle consists of pretty consistent and predictable cash flows, you definitely should use credit card to further enhance the value of your spending.

Scenario A: Monthly Spending

Assuming all the expenses are chargeable to your credit card.

Foods: $400
Transportation: $400
Social and Entertainment: $200

Total: $1,000.00

Normally your card issuer will give you gift point at rate of $1 to 1 point and usually 1 point is worth $0.005 in monetary value.

So, you earned yourself $5 worth of point.

Then on top of that you got at least 20 days (in Malaysia) grace period until next period.

The 1 month fixed deposit rate in Malaysia now is around 3.1% which in turn is 0.258%for one month tenur.

By saving the cash first in fixed deposit account, now you earned another 0.258% by not paying upfront by cash when spending.

In total you now saved a roughly percentage of 0.5% + 0.258% = 0.758% for one month.
In one year time, you can save like 0.758% x 12 = 9% of your average monthly spending which is $90.

Scenario B: Unforeseen circumstances

In Malaysia, we don't have social medical plan like the one in UK or US. Usually we will buy health/hospitalization insurances to hedge the risk of encountering these unwanted events. However even you subscribed to those insurance plans, sometimes (and many times!) the hospital need you to place certain amount of deposit before they allow you to be admitted. In the worst scenario, your medical expenses reimbursement might be released only after 1 or 2 months after you paid the thing yourself.

What if.. just what if.. you don't have any cash at this critical point in time. Someone's life might be at stake and the hospital want to see some money. Yeap, you strew it up.

Credit card can definitely a help here. What you can do is swipe the card to pay the deposit, then you will have 20 days as grace period before repayment. If your claim is not approved by then, some cards allow you to convert your transaction to ZERO (0%) instalment plan at a marginal administration fee (Usually not more than 4% for a 12 month instalment plan).

Your crisis solved and saving the life of the one you love is priceless.

Tips on credit card:

1. Not recommend buying those card balance protection insurance thingy. It's a waste of $$. E.g. CitiBank Credit Shield Plus.

2. Always pay the latest possible you can. Leverage on the grace period, unless you afraid you will forget to pay.

3. 2 to 3 cards should be sufficient.

4. Pay whatever you can with your credit card. It helps you to trace your expenses too.

5. Never pay annual fee. If you are required to pay, cancel the card no matter how good it is. I was used to be a "loyal" card member of a foreign bank in Malaysia that paid more than 3 years of annual fees and yet it doesn't help when I was requesting for increased of credit limit. They just go my cancellation without even apologizing to me. Right after I cancelled that card, another foreign bank immediately approved a card with the limit i wanted.



Good luck.