Credit Card 101: Everything You Need To Know About Credit Cards

Credit cards have an oddly mixed reputation among most people, despite their ubiquity. Having one is often seen as a status symbol simply because it implies you’re well-off enough to finance one. But many of us are also a bit wary over them, due to the horror stories we’ve heard of people going broke over mounting amounts of debt.

But the credit card is just another financial tool, and it’s only as good or as bad as a user’s knowledge and ability to wield one properly. Like any tool, you can financially injure yourself if you misuse them. But use them properly and you’ll not only benefit from their growing convenience, but you can earn perks and bonuses from them if you know which card to pick and what you’ll be spending on them.  

So if you’re looking to reap the rewards of using a credit card without encountering some of the more common pitfalls, or if you’re just curious to know how do credit cards work, this article is for you! 

What is a credit card?

A credit card is a way to pay for goods and services and is essentially a type of short term loan issued by a bank or a financial institution to the account holder.

A credit card is often used for short-term financing. This includes using it for daily spending on goods and services, or for expensive purchases when withdrawing a large amount of cash does not make sense. 

A credit card is not a good solution for long-term financing because of its high interest rates. In fact, it can be more expensive as some credit cards charge interest rates of as high as 18%. A personal loan would be a better long-term option as you can find financing with interest from as low as 5%.

Here are some of the best credit cards out there:

What is the difference between a credit card and a debit card?

In simple terms, a credit card allows you to spend with borrowed money and pay it back later.  It is not linked to your bank account and allows you to spend money up to your credit limit.

You then have a choice to repay the amount spent within 30-days in full and avoid being charged interest or to repay a minimum amount which will be charged interest.

A debit card is directly linked to your bank account (current or savings) and only lets you spend money you already have in your account. Each purchase is automatically deducted from your bank account. Therefore, you need to ensure you have sufficient money in your bank account before you make a purchase with your debit card.

Related: Shopping Tips: When To Use A Debit Card Or Credit Card?

Why do I need a credit card?

There are many credit card benefits through its features that can be a great tool to manage your finances. A few reasons it’s worth considering include:

• It’s safer to carry around than a wad of cash
• You get to enjoy extra benefits including protection on your purchases, cashback, air miles and rewards, and discounts or promotions with retail outlets or restaurants. In fact, rewards cards are specifically tailored towards this purpose. 
• It can be good for your credit score to build credit history, which is needed when applying for other personal finance products such as loans and mortgages
• It can also help you pay for expensive purchases with a 0% interest easy payment plan that splits your lump sum payment into affordable instalments over a duration of months or over a few years. This gives you time to repay the bank for your purchase without being charged interest, however, if you fail to repay the amount within this duration, you will be charged the full interest rate on your balance.

Our credit card guides can help to equip you with the information you need to avoid landing yourselves in a huge amount of debt.

How do credit cards work in Malaysia?

In general, they work the same way as anywhere else in the world. There are a few components to understanding a credit card and how it works. We’ll break it down for you.

For purchases: A credit card allows you to pay for goods and services in person or online. For online payments, you simply need to key in your credit card details, complete with security checks, and the transaction will be processed provided that you have not exceeded your credit limit.

Source: wallethub.com

Credit card repayments: You will need to repay the bank the full amount you have spent on credit. To avoid being charged interest on your outstanding amount, you will need to clear off your balance within 30-days of making the purchase.

However, if you do not wish to pay the full amount on your credit card statement every month, you will need to repay at least the minimum amount. It is always best to repay your monthly bill in full or risk incurring extra costs in the form of interest rate charges.

The pros and cons of using a credit card

Before applying for a credit card, it’s important to understand its advantages and disadvantages. 

What is a supplementary card and when should I apply for one?

A supplementary card is an additional credit card that is issued under the principal account holder’s name upon request. As the principal account holder, you can decide who to give the supplementary card to.

However, a supplementary card-holder must be at least 18 years old at the time of application. Most times, it is given to a close family member like your parent, spouse or child.

A supplementary cardholder does not need to fulfil the minimum requirements as per principal account holder, which makes it a perfect option or your spouse who may not be working or your child who needs a card for emergency cases.

It is a great option if you and your spouse want to consolidate your spending into a single credit card account. You will be able to earn rewards at a faster rate because the cards are linked to a single account holder. However, this also means the danger of spiralling into debt is a lot easier as every single spend is reflected in a shared bill.

Charges and fees

What is a credit limit and how is it calculated?

When you apply for a credit card, the bank reviews two main factors to determine your credit limit – your credit history and monthly income. Your credit limit is the maximum amount of money you can spend on your credit card. In Malaysia, for cardholders earning RM36,000 or less per year, their credit limit cannot exceed two times their monthly income. For cardholders earning more than RM36,000 per year, your credit limit is decided by the banks at their discretion based on your credit history and monthly income. This is in accordance with regulations by Bank Negara Malaysia (BNM).

What are interest rates and how is it calculated?

Interest is a charge applied by banks for lending you money. It is calculated as a percentage of your outstanding balance. The rate is determined by the bank upon review of your credit history and other factors in your application.

Generally speaking, the better your credit score, the lower your interest rate. A healthy credit score demonstrates that you are in a healthy financial position and it is less risky for the bank to approve your application, therefore charging you a lower interest rate.

Interest rates for credit cards vary widely, from around 8% to around 15%. Interest can be charged on retail purchases, balance transfers and cash withdrawals. Usually, different rates are charged for each category, with balance transfers having a lower rate and cash withdrawals having a higher rate.

Some banks also offer an interest-free or grace period for purchases made when you first receive your credit card. This can range from the first 20 days and basically means you receive no interest if you pay your bill in full. 

Note: interest rates for credit cards are mostly charged on a variable interest rate, which means that your interest rate might change with little to no notice. Go through your monthly statement to keep track of the interest rate charged on your credit cards.

How to pay a credit card bill?

There are several ways you can pay off the debt you take on with your credit card. Most people use their bank’s online banking website or app to pay off your credit card debt and each website or app should have a feature to allow you to do this, as with any other bill. You can also submit a standing order to pay off your credit card bill by auto debiting your credit card’s owed amount, assuming you’re confident that your bank balance. 

You should also be able to pay your credit card bill in person at the card’s issuing bank by presenting cash or a cheque at their payment counter, if for some reason this happens to be more convenient (maybe you were in the area) or online banking systems happen to be down. 

What is a credit card statement balance?

According to an article written for the PIDM, the statement balance is the amount owed when the credit card statement (basically your monthly credit card bill) was prepared by the bank, which is essentially a summary of how you used your card within a billing period. 

This is typically around a month, between 28 to 31 days, depending on the issuer. The statement includes how much you spent on the card this month, how much you paid the month before, and the minimum amount.

What is minimum payment and how is it calculated?

This is the very least you need to repay for that month, and you can opt to pay just the minimum amount, the whole bill, or any amount you choose.

Most, if not all banks use this formula to calculate the minimum monthly payment: 5% of the outstanding balance or a minimum of RM50, whichever is higher.

If you only pay the minimum amount, you’ll start paying interest on your outstanding balance so we do not recommend doing this. It will take a lot longer to pay off your debt, and you’ll end up paying a lot more than you borrowed.

Eventually this interest compounds until you are paying off more for incurred interest than actual spending. In Malaysia last year, 6.35 percent of bankruptcy cases were in fact caused by credit card debt. Therefore, always pay more than minimum.

Related: How Credit Card Minimum Payments And Interest Are Calculated

What is an annual fee?

An annual fee is a maintenance fee that is charged by the credit card provider. The actual fee will depend on the bank and may differ depending on the tier of the credit card.

Basic cards may come with zero annual fees whilst the more exclusive or premium cards may come with an RM1,215 annual fee (most expensive in the market) due to its exclusive features and benefits that are costly to maintain. Some banks waive off annual fees depending on cards usage and promotions or on the minimum spend/number of swipes per year.

But be warned that at times, the minimum spend level required to waive the annual fee is unattainable. For example, Maybank’s World Mastercard requires a minimum annual spend of RM120,000 (RM10,000 monthly) in order to waive its RM1,000 annual fee.

What is a late payment fee?

If you make your payment after the monthly deadline on your statement, you might have to pay a late payment charge. Not only do you incur higher charges for the month, this may reflect poorly on your credit history and may translate a lower credit score. Most banks in Malaysia charge you 1% of your outstanding balance r RM10 (to a maximum of RM100), whichever is higher.

Foreign Transaction Fee versus Dynamic Currency Conversion

Many cardholders may not realise this but there are actually two types of fees that can be charged to your credit card when you travel overseas. The Foreign Transaction Fee or the Dynamic Currency Conversion (DCC).

A foreign transaction fee is a fee charged by the bank or credit card issuers on every transaction that is made outside of the card issuer’s country of origin. The fee differs for every card depending on the bank or card issuer, however, can be as low as 1%.

Similar to a foreign transaction fee, the DCC is a fee charged by the merchants to convert your purchase into ringgit or your home country’s currency. On the upside, it is convenient for because you instantly know how much the transaction will cost you in RM, but there is a catch.

More often than not, this conversion is carried out by merchants with less competitive currency rates, so they may charge you a marked-up fee. On top of that, the merchants would make and earn an extra profit by charging the higher rate through DCC on the transaction.

It could be more expensive for you than the 1% foreign transaction fee. Hence, we recommend opting for the Foreign Transaction Fee when making payments overseas.

The key to remember is that you have the option to choose to charge your card with the foreign transaction fee or to opt for the dynamic currency conversion.

Credit Card Application Process

Do your research. For starters, you need to figure out the right credit card for you based on your budget and lifestyle needs. The best way to do this is research. By visiting financial comparison sites like CompareHero.my, we do the hard work for you. With our free comparison tool, all you need to do is key in important details to help us narrow down the best cards for you based on your income level, spending needs, and more. 

Within 30 seconds, we’ll be able to offer you a range of credit cards that work for you. Be sure to review the credit card benefits and features that come with the card, assess the additional fees and charges you would need to pay including annual fees, and determine if it offers you the added benefits you need like cashback or air miles or reward points. Also, be sure to determine that you can meet the minimum requirements for a successful credit card application.  

Research is key and each bank or card issuer will offer you a different card. Ask yourself what you’ll be using for most often and then find the one that works for you best. We have a general guide that can help you choose based on what kind of card user you might be. For instance, you’d pick the Standard Chartered Visa Platinum card if you dine out, shop and travel a lot but groceries and petrol are not much of a concern. 

Check your credit score. You can do this with the various agencies including CTOS, CCRIS, and RAMCI to name a few. You can learn more about credit scores and how they work with our guide here.  

Knowing your credit score will help you determine if your application is likely to be approved or declined. A healthy credit score shouldn’t face any issues; however, an unhealthy credit score may need to be fixed and these improvements could take up to 6 months to reflect in your credit score. Some applications can even be rejected, but we can show how you can improve your chances. 

Related: How Credit Cards Can Affect Your Credit Score

Understand you may not get the rates as advertised online: The interest rates online advertised may not necessarily be the interest rate that you will be offered by the bank. Why? Because the bank reviews each application individually and interest rates are usually determined based on your credit score and your monthly income.

Apply online or at a bank branch. Once you’ve found the right credit card for you, you can proceed to apply online via our website and be sure to submit all the required documents. Or if we currently don’t have a deal with the bank of your choice, you can proceed to the bank’s website. 

Online applications usually take up less time but if you prefer to speak to a customer service representative, you can walk into a bank branch and apply with them face-to-face. Just be sure to have all the required documents handy.

How long will it take to apply for a credit card?

If you’re applying for a credit card online, the actual process doesn’t take much of your time, perhaps 10 – 15 minutes max. If you’re walking into a bank branch, this would depend on the speed of the service provided.

Once you apply through our website, one of our Customer Heroes will be in touch with you within 1-2 days to verify your details and application. Upon verification, the application will be sent to the bank, and you can expect to hear from the bank once your application is approved within 1-2 weeks.

How many credit cards can I have?

In 2011, BNM announced new measures for credit card holders. If you are earning RM36,000 per annum or less, you are only allowed to hold a maximum of two (2) credit cards, from a maximum of two (2) credit card issuers. This means you can get two credit cards from a single bank or up to two banks, but nothing more.

If you earn more than RM36,000 per month, there is no restriction to the number of credit cards you can hold. However, we encourage you to assess your affordability and debt levels before applying for too many credit cards under your name.

What is the difference between Visa, Mastercard, and American Express?

Visa, Mastercard and American Express are payment networks used by the banks which issue the cards. They are basically the computer systems that allow for processing of credit card transactions which they profit from. As a cardholder, you won't find big differences between Visa and Mastercard.

American Express (Amex) is slightly different. It’s not widely accepted by merchants due to cost issues. Amex has a slightly higher processing fee compared to Visa and Mastercard. They also issue their own cards which mean they determine their own interest rates, fees, and payment schedules (not the banks).

As an overview, some of the benefits with these payment networks include:

• Global Customer Assistance Services 24/7 no matter where you are in the world so you can report problems or lost/stolen credit cards.
• 24/7 Concierge services including helping you to make last-minute dining reservations, flight reservations to name a few.
• Deals and discounts exclusive to your card type
• Globally accepted by millions of merchants around the world so you won’t ever have to worry about not being able to pay with your credit card
• Global ATM network allowing you to withdraw cash when you need it
• Exclusive access to airport lounges, golf clubs, and premier hotel memberships

How do banks make money from credit cards?

Fees and charges: Credit card issuers (typically banks) make money from annual fees, late payment fees, cash advance charges and foreign currency transaction fees. Even if you pay your bills on time and never incur interest, banks still rake in a lot of profit via an assortment of fees and charges.

Interest rates: Credit card interest is easily a bank’s biggest form of revenue, as most Malaysian banks charge an average of 11% to 18% of interest on outstanding balances. This is especially true with minimum or late payments, because the more balance you carry forward over a longer period of time, the higher the interest rate will get.

Merchant fees: A lot of people are unaware of this, but the higher your spending power is (in retail purchase), the more profit the banks make. Each time you make a purchase from a merchant, a small percentage of what you pay (usually ranging from 1% – 3%) will go to the credit card’s issuing bank as an interchange fee.

This typically doesn’t directly affect you as a consumer, but some small-scale businesses will ask to charge you the aforementioned 1%- 3% instead, although they are obliged by law to inform you of it beforehand.

Conclusion

Understandably, there is a lot to learn and process when it comes to both choosing the right credit card for you and knowing how to get the most out of it.

While it’s a convenient and undeniably beneficial tool to have, it has a bunch of pitfalls that keep some away from building credit or reaping their rewards.

But with some research and an honest appraisal of what you need your card for, you should figure out which card is the best one for you.