For most people, it is a convenient financial tool that empowers you to “buy now, pay later” while enjoying exclusive privileges from a vast network of merchants. But for the undisciplined, a credit card is similar to a ticking time bomb threatening to explode on your face with massive interest charges if you spend without restraints and fail to make full payment by the end of the month.
In Malaysia, banks generally require you to make only a minimum payment of 5% (or a minimum of RM50) of your bills every month. Choose to settle anything less than the full outstanding balance, and you’ll incur interest known as “Financial Charges” based on a tiered interest rate structure* that looks like this:
| TIER | INTEREST RATE | QUALIFIER |
|---|---|---|
| I | 13.5% per year | Pay bills promptly for 12 consecutive months |
| II | 16% per year | Pay bills for at least 10 out of 12 months |
| III | 17.5% per year | Pay bills for at least nine out of 12 months |
* As recommended by Bank Negara Malaysia, actual interest rates may differ from bank to bank
To put it simply, you’ll be paying a minimum of 13.5% per annum interest on your unsettled credit card bills every time you choose not to make full payment!
To better understand what the consequences of not making full payment, consider these scenarios:
Scenario A:
- You have an outstanding balance of RM10,000
- You choose to make only a minimum payment every month
- You have been paying your bills regularly and promptly and are entitled to the Tier I rate of 13.5%
Provided there’s no new spending, you’ll still need 82 months to pay off the balance and will incur a total of RM2,752.08 in financial charges.
Scenario B:
- You have an outstanding balance of RM10,000
- You choose to make only a minimum payment every month
- You have been paying your bills irregularly and sometimes late and are charged based on the Tier III rate of 17.5%
Provided there’s no new spending, you’ll need a whopping 88 months to pay off the balance and will incur a total of RM3,896.83 in financial charges.
Generally, new cardholders are the easiest to fall victim to these horrific scenarios. According to an article featured in The Star, many university graduates in Malaysia had to be declared bankrupt due to heavy credit spending, which can only be attributed to a lack of financial management or in many cases, a lack of understanding of the credit card system.
There’s only a way to avoid such a shocking experience looking at your bills: Pay off your balance promptly (if possible, in full every time).
