Credit card mistakes to avoid

Credit cards provide convenience when we are strapped for cash but can also prove to be a headache if utilised inappropriately. – AP

Credit cards provide convenience when we are strapped for cash but can also prove to be a headache if utilised inappropriately. – AP

Using them wrongly can lead to unwanted problems

CREDIT cards are one of the most commonly used – and misused debt instruments out there.

Granted, they provide convenience when we’re strapped for cash. On the other hand, they can prove to be a headache if utilised inappropriately.

The following or some examples of how not to use your credit card.

Not settling your debts immediately

This is one of the most common issues that face credit card holders, says licensed financial adviser and syariah financial advisory for Excellentte Consultancy Jeremy Tan.

“They only pay the minimum amount of 5% instead of settling it immediately,” he says

MyFP Services Sdn Bhd managing director Robert Foo concurs with this point.

“If possible, you should settle your bill within the first month itself. If you can’t, that already is a mistake.”

According to Tan, paying the minimum payment result in high credit card finance charges of 1.5% per month.

“In addition to finance charges for the outstanding, all purchases billed will also incur finance charges from the date of transaction. Additionally, all new purchases subsequent to the statement date will also incur finance charges until the outstanding amount, including new purchases, are paid for.

Tan advises individuals to always ensure that they should have money at hand when making purchases, so that when the credit card bill arrives, one would be able to make the payment on time.

Alternatively, he says individuals could consider using debit cards instead.

“A debit card purchase directly deducts monies from your bank’s savings or current account.Alternatively, making a purchase using a credit card, which requires discipline, immediately make payment to the credit card account.”

He adds that one could pay for purchases by installment by leveraging off financial institutions that offer credit cards with zero interest or interest-free terms.

Tan, however, notes that easy payments of zero interest or interest-free installment plans, as advertised by financial institutions, may be a debt trap for credit cardholders.

“Cardholders may be unconsciously caught with mounting debts and may even face bankruptcy due to inability to pay. In addition, when regular payments are not made, it is no longer zero interest or interest free.

“Finance charges of 1.5% per month will be levied for the outstanding amount. The compounding effect of interest on interest will be the debt trap. The effective interest rate will then be more than 18% per annum.”