Just walk into any shopping mall and you are guaranteed to be bombarded with 0% easy payment plan offers, also known as 0% instalment payment plan.
Interest-free credit for purchases has its perks. It allows you to manage your finances with ease, and affording you better cash flow, but if not managed perfectly, this form of credit card usage can seriously derail your finances.
As with any financial products, you need to understand what you are getting yourself into before committing. Though there are many benefits to taking up such a payment scheme, there are also downsides you need to consider.
It does sound good to spread your payment with zero interest into smaller, more manageable monthly repayments, but it can also turn into a great recipe for credit card debts. A 0% instalment plan on your credit card probably works best if you are completely sure that you are able to promptly make the payment every month, and also if you have enough free credit limit to last you until you fully repaid the full amount.
With all these hidden rules to using an instalment plan on your credit card, it makes sense for you to steer clear from this payment scheme for the following purchases:
1) Paying deposit for purchases made with a loan
Many purchases require taking up a loan – such as purchasing a car or a property. However, before you can take up the loan, you are usually required to pay at least 10% down payment or deposit.
If you are purchasing a Perodua Myvi priced at RM42,000, 10% deposit would be RM4,200. If you do not have that money sitting in your bank account, the best thing for you to do is to forget about buying a car until you’ve saved up enough to pay that amount.
Spreading the RM4,200 over 12 months would bring your monthly repayment for your car to this amount:
That is a high monthly commitment to buy a Perodua Myvi. And this is the best case scenario, where you make your credit card payment in full and promptly every month.
If you fail to do so, you will be incurring a whole lot of interest charges. Here’s a scenario where you only pay the a fixed payment of RM150 every month on your credit card balance of RM4,200.
| Monthly instalment for 12 months | RM350 |
| Fixed monthly repayment | RM150 |
| Interest rate | 15% p.a. |
| Time to payoff total balance | 2 years 8 months |
| Total interest incurred | RM513.05 |
The above calculation shows that not paying your credit card instalment in full every month could snowball into hefty charges.
This technique would only work if you are extremely disciplined in your repayments, and also if you actually have the RM4,200 in cash earning interest somewhere.
If you are unable to fulfil these two criteria, there really is no good reason for you to put your down payment on a credit card 0% instalment plan.
2) Making purchases that’s close to or more than your credit limit
Most people think that the monthly instalment for their credit card goes to the merchant. That’s false.
When you make a purchase on your credit card using the 0% easy payment plan, the credit card issuer makes the full payment to the merchant. At the same time, the bank locks your credit limit at the full amount, but only charges you the monthly payment every month.
For example, if you are making a RM4,000 transaction using the payment scheme, you are spreading that amount over 24 months (RM167 a month), but RM4,000 is deducted from your credit limit. If you have a RM10,000 credit limit, you will now only have RM6,000 available for other transactions.
That’s all good, but if you have a low credit limit, this becomes a problem.
Image from Susanne Posel
A fresh graduate earning RM2,000 a month would like to purchase the latest iPhone with a brand new credit card may put himself in credit danger. Assuming his credit card issuer only grants him RM5,000 credit limit on his first credit card, here’s why making a big purchase on instalment plan is a bad idea:
| Credit limit | RM5,000 |
| Price of an iPhone 7 128GB | RM3,699 |
| Credit utilisation ratio | (RM3,699/RM5,000) x 100 = 74% |
The credit utilisation ratio in this scenario is high. Credit utilisation ratio is one of the key factors used to determine a person’s creditworthiness.
According to CTOS, 30% of a person’s credit score is based on his credit utilisation ratio. Though there is no ideal level of utilisation, try to avoid hitting above 80% of your credit limit. Some experts may even recommend staying below 30% but it depends on your limit, income and usage pattern.
Of course, if the purchase you are trying to make is more than your credit limit, the transaction will simply be declined.
3) Making pre-payments for a service or product
As the full payment is made to the merchant by the bank, this makes certain purchases risky for you.
For example, if you sign up for a facial package that cost RM6,000 and spread it over 24 months, you are essentially making payment for services that you have not used.
What if a few months down the road, the salon closes down? You will still have to pay the remaining instalments, as your bank already paid the full sum for the package.
The same applies to gym membership that you pay in full, or even undelivered products. Imagine purchasing a RM8,000 customised bed on a 12-month instalment plan. The furniture shop might need a few months to make the bed and deliver it to you. What if in those few months the furniture store closes down?
You will be liable to make the instalments even though you did not get to enjoy the service or the product.
To protect yourself, avoid signing up for credit card easy payment plan to make pre-payment.
4) Making big purchases that you can’t afford
Making a purchase outside of your financial means always spell trouble. Having an easy payment plan at your fingertips could give you the faux confidence to make big purchases that you cannot afford.
Think of it this way. The instalment plan available on your credit card is merely to help you manage your cash flow so you don’t have to use all your savings in a single purchase. It does not mean you should use it to make a big purchase that you do not have the money to pay for.
If used properly the easy payment plan can do wonders for your finances. Here’s an example: If you would like to buy a work laptop for RM3,500 using the easy payment plan even though you have the cash, here’s how it can help you.
(Must be paid promptly and in full every month to avoid interest charges) | Period: 24 months Returns: RM238.43 |
In this scenario, you get to purchase your laptop interest-free and earn more than RM200 too!
The problem that may arise for those who abuse the scheme is that they will eventually be rolling in deep debts with a terrible credit rating. This will make it very difficult to get another credit facility in the future – be it a personal, car or home loan.
The point is, if you want to buy something, you better have the money in your savings, instead of relying on credit card instalment plans only.
Instalment plans are expensive commitment. One wrong move can put you in the red with the bank. You are not just committing to it financially, you are also committing to the bank for the long-term, at least until you’ve paid off your instalment plans.
For credit cards that charge a hefty annual fee, you will no longer have the luxury of threatening to cancel your card just to get the annual fee waived.
Just like credit card itself, the easy payment scheme is a great feature if you always stay one step ahead of it. When you pay credit cards in full each month, you are charged little or no interest. However, be wary of its impact on your credit ratings.
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