Should You Use Credit Cards?

We’ve all heard the sentiment that credit cards are bad. I’ve even met some people who avoid credit cards even though they are very responsible with their money. So what gives? Are credit cards really bad?

First, let’s examine how credit cards work.

When you make a purchase using a credit card, the credit card company (usually the bank) pays the vendor first on your behalf. The vendor receives the money and you get your purchase. You then owe the bank the amount of money used for the purchase.

Behind the scenes though, the bank actually takes a small cut of the transaction you just made. Exact percentages can vary but it is around 2% of the transaction. So if you bought something at a price of RM100, the vendor only receives RM98.

Part of the transaction fee that the bank takes is then used to reward the credit card owner (purchasers like you) to use the card more often, making the bank more money. Rewards can range from free gifts, to points, cashback, airline miles, and so on. Banks tie different reward packages to different cards.

Here’s the important bit: vendors who accept credit card payments will have definitely factored the bank’s transaction fee into their prices. So whether you pay by cash or credit card, you’ll be paying this fee. The advantage of using the credit card then is that you get all those perks that the bank offers you on your particular credit card. If you pay by cash, you miss out.

So does that mean credit cards should be used all the time? Well, yes if you follow the most important rule of credit card usage.

If you want to use a credit card, always, always pay off your bill in FULL at the end of the month. Never allow an outstanding balance to flow over to the following month. Whatever the bank tells you your credit card bill is for the month, pay it fully.

The problem if you don’t pay in full is that you start accumulating interest on the money you owe the bank. Interest on credit cards is usually a whopping 18% per year. This is a massive amount of interest and can get overwhelming very quickly.

To put it in perspective, not paying off your credit card makes the purchases you made cost 18% more per year. A RM100 purchase now costs you RM118. A RM500 purchase now costs you RM590.

My rule of thumb is only use the credit card if you already have the money for it in your bank account. Do not spend if you do not have the money already. Treat your credit card like a medium of payment and not like a source of cash, and you will enjoy the benefits safely.