You may be scared of using credit cards because you have heard the horror stories that come with it. After all, most of us have been taught that having credit card debt is a bad thing. But, we are debunking some common myths in this article to separate the truth from the untruths. Empower yourself with the right knowledge so you can get the most benefit out of a credit card.
Myth 1. Credit card interest is charged immediately after each purchase with a card
Fact: When making payment with a credit card, you are borrowing money from the bank. However, you won’t be charged interest immediately. Most banks in Malaysia have an interest-free grace period of 20 days for credit cards. If you pay the full amount charged to your card during the grace period, you won’t be charged any interest. But if you make the minimum payment, you will then be charged interest on the remaining balance you have not paid.
Myth 2. You should only have one credit card
Fact: Although having more credit cards than you can keep track of is not a smart move, limiting yourself to only one may not be the way to go either depending on your lifestyle and spending habits. This is because different credit card offers different perks and benefits. For example, it would be smart to use one card to consolidate cashback while another card to collect air miles when you travel.
Myth 3. Using a credit card will get you into debt problems
Fact: Scared that you’ll end up with debt problems if you use credit cards? If you are disciplined with your payments, credit cards won’t cause you to go broke. Cash isn’t always king, especially when you lose out on enjoying the benefits of using a credit card. You can also save money by using the right credit card. In order to do so, you just need select credit cards that match your spending habits. Families can benefit from a cashback credit card when making petrol and groceries purchases. If you travel often, you can save on plane tickets with an air miles credit card.
Myth 4. Applying for more than one credit card will have a bad effect on your credit score
Fact: Your credit score is determined by various factors such as how well you are paying your financial commitments. However, taking on another credit card will not badly affect your credit score. What you will need to focus on, if you do take on an additional credit card, is to make sure you keep making prompt payments. Late payments are among one of the key factors that may worsen your credit score.
However, if you are a primary card holder with a supplementary card, it could also cause a dent to your credit rating. This is if the supplementary cardholder defaults on the payment, as a primary cardholder you will be suffering the consequences.
Myth 5. You should only make big purchases with a credit card
Fact: Although you may think you should use a credit card when making big money purchases, that’s not necessarily true. Some people may also think you should not get into debt for necessities like when buying meals or groceries. However, making those purchases with a credit card and then paying the credit card bill in full means you won’t be charged any interest. It is also a good idea to make certain payments with a credit card because of the extra perks you will receive such as cashback and exclusive discounts for credit card holders. So you can benefit by using a credit card for everyday expenses, not just when making big purchases.
Myth 6. Getting a new credit card to pay off another credit card is bad
Fact: You may think that getting a new credit card to pay off another credit card does not make sense. But if you can get a new credit card which offers a good balance transfer, it may be a good deal. For example, you can take advantage of the low interest rate to reduce or even pay off your existing credit card debt which charges 16%. Balance transfers can help you to clear off your debt at a low or even 0% interest rate but this is of course if you make sure you stay on top of your payments and are diligent with your payments.
Myth 7. Making the minimum payment is enough
Fact: Credit card holders are required to make minimum payment of 3-5% of their outstanding balance every month, or a certain amount which are determined by the banks. New credit cardholders may get confused with the term “minimum payment” thinking that is the total amount they owe each month. Some people may also think that making the minimum payment for their credit card will be enough.
Let’s say you buy an iphone7 which cost RM3,199 with your credit card. You then only pay off a minimum payment of RM150 every month. With an annual interest of 18%, it will take you 26 months (approximately 2.1 years) to pay it all off. You will then end up paying a total of RM3,884.10, out of which RM685.10 being the interest you have to pay. If you pay RM300 every month, you will be able to pay it off in 1 year at a total cost of RM3,512.42 out of which RM313.42 is the interest. So you can save a lot of time and money by paying more than the minimum!
Remember to look at the total current balance when you receive your monthly statement to see the actual total amount you owe. Ideally, you should be able to pay that amount in full every month. But if that is not possible, make sure you pay more than the minimum amount. By doing so you minimise the amount of interest you have to pay for the remaining balance.
Does a credit card made of gold sound like a myth? It turns out there are credit cards made of the precious metal! Apparently, a Russian bank issued credit cards made of solid gold. However, as the credit card does not have the magnetic strip section, it can’t actually be used for payment.
Now that you know between what is true and false, you can shake off the fear of using credit cards. Remember, when used correctly, a credit card has many perks and benefits.
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