I HAVE 40 years of experience with credit cards covering the good, the bad and the ugly. So, do read on; then decide if you wish to heed at least some of my hard-won observations about them made across two-fifths of a century.
1. No one expects to get into trouble with credit cards... in the beginning
Most people never get into catastrophic financial problems because of credit cards. But the sizeable minority that does can be – depending on the country in question — a cohort numbering mere hundreds of thousands to tens of millions of adults. For specifics, we'll need to scrutinise the population size and financial institutional penetration of the country in question.
2. Credit cards all have two main attributes we must be aware of, namely, convenience and line of credit
Both attributes are useful. However, those who choose to ONLY use the first, convenience, but never the second, line of credit, for any length of time beyond a few days won't ever fall prey to the worst traps of out-of-control credit card expenditure.
3. We all crave convenience
Let's say you wish to purchase a large screen SMART TV, which you can readily afford, for RM7,000.
Assuming the cash purchase price and the quoted credit-card price is the same, it is much more convenient to whip out your "magic" plastic card and pay for it with a swipe and the entry of your PIN, than traipsing to the bank, withdrawing RM7,000 in a combination of RM50 and RM100 notes, stuffing that fat wad of cash into your pocket, and heading to the electronics store without attracting undue attention and safety risks.
If you use your credit card for convenience and, frankly, safety, yet proactively choose not to use its revolving credit line for too long, you would make a note of the purchase and shift some of your money around, possibly between various bank accounts to fully repay your recently ballooned card balance.
Doing so will keep you from incurring your credit card account's hefty interest charges, which in Malaysia range between 1.25 per cent and 1.50 per cent a month.
4. It strokes our ego to be granted credit
All of us, to some extent, are status conscious. And it's psychologically reaffirming when a bank entrusts us with a credit card limit.
Decades ago, I was present at bragging contests among friends in their 20s and 30s, who crassly compared credit card limits. Those who had limits in the RM5,000 to RM10,000 range felt more successful than those who couldn't qualify for a credit card at all; while those with limits in the, say RM12,000 to RM30,000 range gloated over those with smaller limits, yet felt intimidated by those with limits in the RM35,000 to RM100,000 range.
My subsequent experiences taught me banks don't ratchet up your various credit limits over time for your benefit. No, they do it for their gain.
Nonetheless, they still walk a fine line. No institutional creditor wants to deal with deadbeats who stop paying their bills. However, by steadily increasing our credit limits in a calibrated manner, they maximise the number of ideal paymasters who repay at least the minimum owed most months, but who also accept the high interest charges that accumulate on unpaid balances.
So, while it is both ego-building and ego-stroking to be entrusted with a high credit card limit, it is wisest for consumers to only use a portion of their credit limit for the convenience afforded to them, but to ALWAYS repay everything that is charged earlier than the monthly pay-by date.
5. The world's economy is partially dependent on credit expansion for its upward growth trajectory
Human nature is such that most people who read this but who don't already pay off their credit card bills in full each month will not change their habits.
Such behaviour promotes global economic growth as measured by Earth's GWP or gross world product. Credit expansion fuels planetary economic growth by increasing the velocity of money and the number of financial transactions worldwide every single day.
Furthermore, one aspect of credit card usage that is seldom scrutinised is how we are inclined to spend more money when we don't use physical cash, paper money.
For a simple self-test, ask yourself which RM1,000 expense would be easier for you to make:
1. Swiping or tapping your credit card once for RM1,000; or
2. Peeling off 20 RM50 notes from your wallet.
If I've at least piqued your interest (pun intended) in credit card usage, watch Episode 2 Credit Cards of the illuminating 2021 Netflix docuseries Money, Explained. I urge you to watch it twice. First all the way through as edutainment. Then, perhaps a week later, with notebook and pen well in hand.
If you already handle credit cards well, good for you. If you are having problems, though, I hope rereading this column and watching that brief 23-minute Money, Explained episode will help you. But first you must want to beat your credit card debts into submission.
© 2023 Rajen Devadason
Rajen Devadason, CFP, is a securities commission-licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on Twitter @Rajen Devadason and on YouTube (Rajen Devadason).