Why Credit Cards Are A Type of Loan

Credit cards can be used to your advantage, provided that you use it wisely. You need to understand how a credit card works in order to get the most from it.

Did you know that 47% of Gen Ys in Malaysia have high credit card debt? A report by Asian Institute of Finance also stated that 70% of Gen Y who owns credit cards only paid the minimum monthly payment, while 45% do not pay off their credit card debt on time. That’s not it, 40% Gen Y in Malaysia also admitted to spending more than they can afford.

But it’s not all doom and gloom, we’ll explain more on credit cards better understanding will help you to enjoy the advantages of using one. Read on to understand why a credit card is a type of loan so you don’t get into financial trouble by misusing it.

A Credit Card is NOT Free Cash

When you pay for a restaurant meal using a dining credit card, your credit card company is actually lending you the funds needed to pay for your bill. You have to then pay back your credit card company within the 30-day statement.

Do also understand that your credit limit is not free cash. The most important distinction between cash and credit cards is that cash can be considered an asset, while a credit card is a possible liability. Cash is an asset because it can add towards your net worth. Having money won’t disadvantage you, except that if you have more you have to pay for higher taxes.

However, a credit card is actually a type of loan that can facilitate your payments. If you are unable to pay off your credit card bill in full before the 30-day statement ends, you are actually taking on a loan. But, this is a loan with a very high interest rate. In Malaysia, the maximum interest rate on credit cards is 18% per annum!

When you take on a loan, it means you are in debt, and remember that debt subtracts from your net worth. This is why credit cards can be a liability if not managed properly.

But, You Can Choose to Not Use It as A Loan

Even though a credit card can be considered a liability, and is actually a type of loan, here is how to use it wisely.

• Make sure you pay off the full amount spent on your credit card every month. Do not carry forward a balance and always pay more than minimum.
• Do not use it to withdraw cash from the ATMs. Using it to get a cash advance, will cause you to be charged with high-interest Banks usually charge the maximum of 18% on any ATM withdrawals because it’s immediate cash-in-hand that you owe the bank.
• Understand the effect of compound interest. Compounding interest means that interest is charged on top of any interest that you owe. To understand more about how compound interest works, read here.
• Pay your credit card bills on time, within the 20 days interest free period.
• If you cannot pay for it in cash, you cannot afford it. Only swipe for things that you can repay in full.
• Don’t use a card to make ends meet.

If you are not careful, you can find yourself struggling just to keep up with the minimum payments on your credit card every month. If you are in a situation where you need a loan, it will be better for you to apply for a personal loan, or opt for a balance transfer. This is because the lower interest rates a personal loan offers, and the longer interest-free period from a balance transfer, can help you pay back the loan in a timely and manageable manner.

Maximise the Rewards When You Spend with Your Credit Card

The most attractive thing about using credit cards are the many rewards, privileges and benefits it gives you. From air miles and reward points to exclusive discounts and cash rebates, there are many ways credit cards help you save money, or it can give you more value for your spending. But this only works if you use your credit cards responsibly and wisely, and maintain a zero balance across all your cards. You’ll see how credit cards can be better than cash.

When used correctly, credit cards are beneficial and rewarding. Your credit cards offer convenience, allowing you to make purchases without needing a ton of cash on you. With interest-free periods of 20 days, credit cards can also be safely used to provide short-term liquidity, but you must be disciplined to pay your credit card bill timely.

Aside from that, with a credit card you also get the advantage of using the easy payment plan (EPP). Essentially, it is a feature that gives you flexibility to use your credit card to make payment for a substantial amount, then repay it in instalments within a certain period.

The duration for the instalments will depend on the financial institutions or credit card issuers. However it usually ranges from 3 months to 24 months. EPPs are useful for larger purchases such as electrical items and furniture. However, there are certain things you need to know to take advantage of this feature. To know more, click here.

Perhaps the most attractive reason to use credit cards are the privileges and perks they provide. Therefore, your main reason for using credit cards should be to benefit from the rewards and the convenience it provides, do not look at it as having “extra” money to spend.  Remember to always pay off your credit card bills on time and in full instead of just making the minimum monthly payments.

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