Is a Credit Card Right For You?

Free plane tickets! Instant discounts on spending! Credit cards are great. Heck even (slightly contrived) online wars have erupted between different cards camps, each side insisting their card is better.

Seeing the online passion for the plastic can make it seem that owning a credit card is just good financial sense; after all, the freebies are just too good to miss out.

But if you are a card newbie, this noise can obscure a fundamental question: is a credit card actually right for you?

First, one has to understand what a credit card is.

What is a credit card?

Most of us have debit cards, which are simple to use: whenever we swipe them, we spend from our bank accounts.

Credit cards are different. Every time a credit card is used, a loan is taken from the bank.

But wait, you might ask, don’t loans charge interest?

Yes, and credit cards are no different. The difference is that the interest is waived if cardholders are timely with their bill repayments.

So what happens when I cannot pay my credit card bill?

Many bad things happen at once, so let’s detail them one by one.

Interest

Once a bill is late, interest (aka finance charges, admin fee, etc.) starts being charged. In Brunei, credit card interest rates are typically 1.5% per month, on any outstanding balance.

For example, if your credit card bill comes up to $1000 at the end of the month and you’ve paid half of it, the 1.5% interest rate will only be applied to the remaining half of your outstanding amount. This will be reflected in your next monthly bill.

Additional late payment penalties

Late fees are also applied when one cannot pay at least the minimum repayment sum (usually 8% of the outstanding balance or a minimum of $40-$50 per month). Some banks like BIBD do not charge late fees, while others like Standard Chartered charge 5% of the minimum payment or $25.

And remember the original 1.5% interest rate? Well, once any bill isn’t paid in full, any new charges to the credit card instantly attracts the standard interest rate.

Lastly, personal credit scores will get affected too, so getting a loan in the future will get harder.

So yea, lock away your credit card once you can’t pay up.

How to pay your credit card bills

A common tip is to set up a standing instruction with your bank to ensure that credit cards are automatically paid in full, and on time.

But it’s still not a set-and-forget system, because of 2 reasons:

• Credit card fraud happens, it’s important to monitor credit card bills each month. (Our colleague recently discovered unauthorised charges to his credit card)
• Some card annual fees are also automatically charged. You’ll want to waive these fees to maximize a credit card.

Okay, whew. So as you can see, owning a credit card isn’t fuss-free. There is a small level of effort required. If you’re feeling frazzled, tired (or even bored) reading this article about credit card mechanics, maybe -just maybe- they aren’t for you.

But wait there’s more! All we’ve covered so far are just the basics – these simply ensure one does not get burnt by credit cards.

The next level

But to become a true master of cards – and benefit off them – there’s more work involved. What that entails depends on the type of card.

The most popular credit card is Rewards card, with a few ways for a cardholder to claim rewards (these ways differ from card to card). There are two common types of cards:

• One that works with a point system to get you to spend and redeem through cash-back, air miles or donation to local charities
• One that offers discounts at participating stores.

For both types, the most sensible way to overcome these issues is to thoroughly evaluate if your current lifestyle fits the spending requirements or rewards system.

After all, spending more so you can save, or suddenly becoming a spontaneous traveller…doesn’t make a whole lot of sense.

But even after, doing all this work just to get the perfect card, there’s still one final obstacle.

T&Cs for the rewards system change, sometimes yearly. It’s very common to see credit cards become the hottest thing in town – with the best bonuses – attracting frenzied sign-ups.

But after a year or two? The rewards get quietly scaled down to ho-hum levels. The savviest card users would cancel their cards and go through the whole process again, in the quest to find a new card that suits them best.

Ngalih eh...

In the end, credit cards can really provide nice benefits and can be a sound financial choice – if you’re ready to put in the effort. As illustrated, winning with credit cards is not a given, it requires effort and a basic level of finance geekery. There are dedicated websites and blogs just to teach people how to optimise their cards ; if this whole credit card thing was truly easy, these sites wouldn’t have to exist!

Credit cards are unsuitable for those who prefer not to introduce financial clutter into their lives. What’s worse, if placed in the hands of someone who crawls towards payday every month – it can be the gateway to financial ruin.

For these camps, there’s really nothing wrong with the good ol’ debit card.