Credit Card Basics

What is a credit card?

A credit card is a way to pay for goods and services and is essentially a type of short term loan issued by a bank or a financial institution to the account holder. This means that whenever you spend with your card, you’re borrowing money from the bank and paying for it with credit. Before your credit card is approved, the bank will review your credit history and monthly income to decide the maximum amount you can spend on your card (credit limit) and other terms. This differs from application to application.

A credit card is a substitute for cash and is often used for short-term financing. This includes using it for daily spending on goods and services, or for expensive purchases when withdrawing a large amount of cash does not make sense. You must pay for your purchases made on credit within 30-days of purchase to avoid being charged interest.

A credit card is not a good solution for long-term financing because of its high interest rates. In fact, it can be one of the more expensive options as some credit cards charge an interest rate of 18%, which is the highest in the market. Instead, a personal loan would be a better option for long-term and you can find financing with interest from as low as 5%.

Interest rates different between the various banks and type of credit card. It may also fluctuate based on how prompt your repayments are. If you pay your dues in a timely manner, you’ll be rewarded with a lower interest rate. Your credit score can also impact the interest rate offered to you, typically, the healthier your credit score, the lower the interest rate.

What is the difference between a credit card and a debit card?

In simple terms, a credit card allows you to spend with borrowed money and pay it back later.  It is not linked to your bank account and allows you to spend money up to your credit limit. You then have a choice to repay the amount spent within 30-days in full and avoid being charged interest or to repay a minimum amount which will be charged interest.

A debit card is directly linked to your bank account (current or savings) and only lets you spend money you already have in your account. Each purchase is automatically deducted from your bank account. You, therefore, need to ensure you have sufficient money in your bank account before you make a purchase with your debit card.

Why do I need a credit card?

A credit card can offer you many benefits through its features and can be a great tool to manage your finances. However, it’s critical to equip yourself with the knowledge on how to use one to avoid landing yourself in an expensive mound of debt.

A credit card is a great substitute for cash provided that you are able to repay the amount you spend each month. A few reasons it’s worth considering include:

• It’s safe to carry around than a wad of cash
• You get to enjoy extra benefits including protection on your purchases, cashback, air miles and rewards, and discounts or promotions with retail outlets or restaurants
• It can be good for your credit score to build credit history, which is needed when applying for other personal finance products such as loans and mortgages
• It can also help you pay for expensive purchases with a 0% interest easy payment plan that splits your lump sum payment into affordable instalments over a duration of months or over a few years. This gives you time to repay the bank for your purchase without being charged interest, however, if you fail to repay the amount within this duration, you will be charged the full interest rate on your balance.

Our credit card guides can help to equip you with the information you need to avoid landing yourselves in a huge amount of debt.

How do credit cards work?

There are a few components to understanding how a credit card works. We’ll break it down for you.

For purchases: A credit card allows you to pay for goods and services in person or online. For online payments, you simply need to key in your credit card details, complete with security checks, and the transaction will be processed provided that you have not exceeded your credit limit. For in-store purchases, a simple swipe or tap your credit card at the payment terminal and authorise the transaction with either a PIN or a signature. This entire process goes through multiple parties however it will feel like a seamless experience for you.

Typically, there are five parties involved in a credit card transaction:

• Cardholder: You or any other authorised person (like your spouse or children whom you’ve given supplementary cards to) who can use the credit card to make purchases
• Card Issuer: Institutions, such as banks and consumer finance companies, that issue credit cards
• Credit Card Network: Organisations that set up the payment ecosystem and act as the middlemen between merchant acquirers and card issuers (like Visa, MasterCard and American Express)
• Merchant Acquirer: Institutions, often banks, which process credit card transactions for merchants using a POS terminal
• Merchant: Retailers, restaurants and e-commerce sites around the world that allow credit cards as a form of payment

Credit card repayments: You will need to repay the bank the full amount you have spent on credit. To avoid being charged interest on your outstanding amount, you will need to clear off your balance within 30-days of making the purchase. However, if you do not wish to pay the full amount on your credit card statement every month, you will need to repay at least the minimum amount. It is always best to repay more than the minimum amount because it may then take you years to clear off your outstanding balance and you will have incurred extra costs in the form of interest rate charges.

The pros and cons of using a credit card

Before applying for a credit card, it’s important to understand its advantages and disadvantages. A credit card can be extremely beneficial for you when used responsibly, you can enjoy the ease of the “buy-now-pay-later” concept and earn cashback, rewards or air miles every time you spend. However, it’s important to realise there are pitfalls to a credit card if mismanaged, which will cause you to pay a very expensive credit card bill with high-interest rate charges and racking up more debt than you can afford.

The Pros

• Speed and Efficiency: A credit card is extremely easy to carry around, it’s weightless and doesn’t take up much space in your wallet. In fact, it’s hard to tell you even own one. Unlike a wad of cash that would be quite obvious hence making it a little less secure to carry around with you. Paying with a credit card is quick and seamless, often requiring nothing more than a swipe or tap on the payment terminal. You then key in your PIN or authorise the purchase with your signature and the transaction is complete.

• Protection: Unlike cash, credit card providers usually offer their customers protection on the purchases made with their card. A purchase protection plan offers coverage against theft or accidental damage. Coverage varies between providers so be sure to check if it is included in your credit card if this is a feature you are looking for.

• Buy-now-pay-later: For times when you need to make an expensive purchase and can’t afford to pay for all of it in one go, credit cards are a great solution. With the Easy Payment Plan (EPP) option, you can break your lump sum payment into affordable monthly instalments at 0% interest over a specific duration. This essentially allows you to borrow money for free through your card, as you aren’t being charged any additional interest. However, if you miss the deadline you’ll be paying the price for it with interest being added to your outstanding balance at the end of every month.

• Earn benefits while you spend: When paying with cash, once the money leaves your hand you walk away with your purchased item and that’s about it. With a credit card, you can opt to apply for a card that provides you added benefits every time you spend which includes cashback, reward points, and air miles to name a few. This is only worthwhile if you are able to pay your bill in full – else the interest that you get charged on the outstanding balance each month cancels out the value of the rewards.

• Emergency aid: In times when you are in need of extra funds and can’t seem to find an ATM near you to withdraw cash, a credit card can come to your rescue. It’s a security blanket that offers that assurance you will still have some form of payment if anything goes wrong with your debit card or you’re suddenly out of cash.

• Good for your credit score: This is true only if you are able to use your credit card responsibly and can demonstrate your ability to make for your bills on time while paying off more than the minimum amount.

PROS	CONS
Easy to carry/use Purchases are protected Buy now, pay later concept Extra benefits Good for emergencies Can be good for credit score	Easy to spiral into debt High interest rates Charges and fees (hidden costs) Expensive cash withdrawals Can be bad for credit score Fraudulent charges and identity theft

The Cons

• The debt trap: It’s easy to forget as you’re spending with your credit card, that you’re actually using borrowed money which you always have to pay back. As easy as using a credit card is, there are risks involved of which the major one is falling into a spiral of debt. Because you’re not parting with physical cash each time you make a payment, it’s easy to lose track of your expenses. Once you find that you’re unable to pay off the total bill at the end of each month, you’ll start to rack in added charges in the form of high-interest Your debt will start to spiral out of control month-on-month and you’ll find yourself in a nasty cycle. You should always try to pay off more than the minimum amount and think of your credit card as a short-term financial tool.

• Hidden charges and fees: The interest rate is not the only charge or fee you’ll have to worry about. There are others that you don’t necessarily notice until your monthly statement arrives which includes the annual fee, late payment fee, and penalty fees when you exceed your credit limit. These can creep up on you without realising it so be sure to always read the terms and conditions of your credit card.

• Expensive cash advance: Unlike your debit card, a credit card should not be used to withdraw cash from the ATM. This is usually the last resort and only in cases of ultimate emergencies. Why? Because the interest rate you’re charged on cash advance withdrawals is usually the highest the bank will offer (between 17% – 18%) and isn’t worth it. On top of that, you get charged a 5% transaction fee every time you withdraw.

• Can be bad for your credit score: This is true especially if you get caught in the debt trap and find yourself unable to make timely payments or if you can only afford to pay the minimum amount every month.

• Fraud and scams: The main danger with carrying cash is usually theft. However, with credit cards, you are susceptible to other crimes including scams or fraudulent activity. Most credit cards are equipped with safety and security features to protect your account and your purchases, however, there are instances when you might find a fraudulent charge on your statement. Or you may have fallen victim to a very convincing scam which sees you divulging confidential information at risk of losing the security of your credit card. In instances such as these, contact your credit card provider immediately and there are measures in place to ensure this is rectified.

What is a supplementary card and when should I apply for one?

A supplementary card is an additional credit card that is issued under the principal account holder’s name upon request. As the principal account holder, you can decide who to give the supplementary card to. However, a supplementary card holder must be at least 18 years old and most times this is given to your spouse or to your child.

A supplementary cardholder does not need to fulfil the minimum requirements as per principal account holder, which makes it a perfect option or your spouse who may not be working or your child who needs a card for emergency cases. It is a great option if you and your spouse want to consolidate your spending into a single credit card account. You will be able to earn rewards at a faster rate because the cards are linked to a single account holder. However, this also means the danger of spiralling into debt is a lot easier as every single spend is reflected in a shared bill.

Charges and fees

What is a credit limit and how is it calculated?

When you apply for a credit card, the bank reviews two main factors to determine your credit limit – your credit history and monthly income. Your credit limit is the maximum amount of money you can spend on your credit card. In Malaysia, for cardholders earning RM36,000 or less per year, their credit limit cannot exceed two times their monthly income. For cardholders earning more than RM36,000 per year, your credit limit is decided by the banks at their discretion based on your credit history and monthly income. This is in accordance with regulations by Bank Negara Malaysia (BNM).

What are interest rates and how is it calculated?

Interest is a charge applied by banks for lending you money. It is calculated as a percentage of your outstanding balance. The rate is determined by the bank upon review of your credit history and other factors in your application. Generally speaking, the better your credit score, the lower your interest rate. A healthy credit score demonstrates that you are in a healthy financial position and it is less risky for the bank to approve your application, therefore charging you a lower interest rate.

Some banks also offer an interest-free or grace period for purchases made when you first receive your credit card. This can range from the first 20 days and basically means you receive no interest if you pay your bill in full. We recommend taking advantage of this grace period while you can, but be sure that you can afford to repay the amount on your card before the interest-free period is over.

As of 2011, BNM introduced the tiered interest rates to help consumers manage their debt. A tiered interest rate involves different rates of interest depending on whether the cardholder can make timely repayments. For instance, the bank may offer you interest rates between 15% to 18% and this depends on how prompt your repayments are. For prompt repayments over a 12-month duration, they may decide to charge you the lower rate of 15%, however, if you consistently make late repayments they may decide to charge you the higher rate of 18%.

Interest rates for credit cards vary widely, from around 8% to around 15%. Interest can be charged on retail purchases, balance transfers and cash withdrawals. Usually, different rates are charged for each category, with balance transfers having a lower rate and cash withdrawals having a higher rate.

Note: interest rates for credit cards are mostly charged on a variable interest rate, which means that your interest rate might change with little to no notice. Go through your monthly statement to keep track of the interest rate charged on your credit cards.

What is minimum payment and how is it calculated?

When your credit card statement arrives, you’ll notice that there will be your total outstanding balance amount and a minimum amount. This is the very least you need to repay for that month, and you can opt to pay just the minimum amount, the whole bill, or any amount you choose.

If you only pay the minimum amount, you’ll start paying interest on your outstanding balance so we do not recommend doing this. It will take a lot longer to pay off your debt, and you’ll end up paying a lot more than you borrowed. Always pay more than minimum.

Most, if not all banks use this formula to calculate the minimum monthly payment: 5% of the outstanding balance or a minimum of RM50, whichever is higher.

What is an annual fee?

An annual fee is a maintenance fee that is charged by the credit card provider. The actual fee will depend on the bank and may differ depending on the tier of the credit card. Basic cards may come with zero annual fees whilst the more exclusive or premium cards may come with an RM1,215 annual fee (most expensive in the market) due to its exclusive features and benefits that are costly to maintain. Some banks waive off annual fees depending on cards usage and promotions or on the minimum spend/number of swipes per year. But be warned that at times, the minimum spend level required to waive the annual fee is unattainable. For example, Maybank’s World Mastercard requires a minimum annual spend of RM120,000 (RM10,000 monthly) in order to waive its RM1,000 annual fee.

What is a late payment fee?

If you make your payment after the monthly deadline on your statement, you might have to pay a late payment charge. Not only do you incur higher charges for the month, this may reflect poorly on your credit history and may translate a lower credit score. Most banks in Malaysia charge you 1% of your outstanding balance r RM10 (to a maximum of RM100), whichever is higher.

Foreign Transaction Fee versus Dynamic Currency Conversion

Many cardholders may not realise this but there are actually two types of fees that can be charged to your credit card when you travel overseas. The Foreign Transaction Fee or the Dynamic Currency Conversion (DCC).

A foreign transaction fee is a fee charged by the bank or credit card issuers on every transaction that is made outside of the card issuer’s country of origin. The fee differs for every card depending on the bank or card issuer, however, can be as low as 1%.

Similar to a foreign transaction fee, the DCC is a fee charged by the merchants to convert your purchase into ringgit or your home country’s currency. On the upside, it is convenient for because you instantly know how much the transaction will cost you in RM, but there is a catch. More often than not, this conversion is carried out by merchants with less competitive currency rates, so they may charge you a marked-up fee. On top of that, the merchants would make and earn an extra profit by charging the higher rate through DCC on the transaction. It could be more expensive for you than the 1% foreign transaction fee. Hence, we recommend opting for the Foreign Transaction Fee when making payments overseas.

The key to remember is that you have the option to choose to charge your card with the foreign transaction fee or to opt for the dynamic currency conversion.

Applying for a Credit Card

How do I apply for a credit card?

Do your research: For starters, you need to figure out the right credit card for you based on your budget and lifestyle needs. The best way to do this is research. By visiting financial comparison sites like CompareHero.my, we do the hard work for you. With our free comparison tool, all you need to do is key in important details to help us narrow down the best cards for you based on your income level, spending needs, and more. Within 30 seconds, we’ll be able to offer you a range of credit cards that work for you. Be sure to review the benefits and features that come with the card, assess the additional fees and charges you would need to pay including annual fees, and determine if it offers you the added benefits you need like cashback or air miles or reward points. Also, be sure to determine that you can meet the minimum requirements for a successful credit card application.  Research is key and each bank or card issuer will offer you a different card, find the one that works for you best.

Check your credit score: You will also need to check your credit score and you can do this with the various agencies including CTOS, CCRIS, and RAMCI to name a few. Knowing your credit score will help you determine if your application is likely to be approved or declined. A healthy credit score shouldn’t face any issues; however, an unhealthy credit score may need to be fixed and these improvements could take up to 6 months to reflect in your credit score.

Understand you may not get the rates as advertised online: The interest rates online are advertised and may not necessarily be the interest rate that you will be offered by the bank. Why? Because the bank reviews each application individually and interest rates are usually determined based on your credit score and your monthly income.

Apply online or at a bank branch: Once you’ve found the right credit card for you, you can proceed to apply online via our website and be sure to submit all the required documents. Or if we currently don’t have a deal with the bank of your choice, you can proceed to the bank’s website. Online applications usually take up less time but if you prefer to speak to a customer service representative, you can walk into a bank branch and apply with them face-to-face. Just be sure to have all the required documents handy.

How long will it take to apply for a credit card?

If you’re applying for a credit card online, the actual process doesn’t take much of your time, perhaps 10 – 15 minutes max. If you’re walking into a bank branch, this would depend on the speed of the service provided.

Once you apply through our website, one of our Customer Heroes will be in touch with you within 1-2 days to verify your details and application. Upon verification, the application will be sent to the bank, and you can expect to hear from the bank once your application is approved within 1-2 weeks.

How many credit cards can I have?

In 2011, BNM announced new measures for credit card holders. If you are earning RM36,000 per annum or less, you are only allowed to hold a maximum of two (2) credit cards, from a maximum of two (2) credit card issuers. This means you can get two credit cards from a single bank or up to two banks, but nothing more.

If you earn more than RM36,000 per month, there is no restriction to the number of credit cards you can hold. However, we encourage you to assess your affordability and debt levels before applying for too many credit cards under your name.

Credit Card Providers

Which banks provide credit cards in Malaysia?

• AEON Credit Service
• Affin Bank
• Alliance Bank
• AmBank
• Bank Islam
• Bank Rakyat
• BSN
• CIMB Bank
• Citibank
• Hong Leong Bank
• HSBC
• Maybank
• OCBC
• Public Bank
• RHB Bank
• Standard Chartered
• UOB

 What is the difference between Visa, Mastercard, and American Express?

Visa, Mastercard and American Express do not issue credit cards, it is issued by banks or financial institutions. Visa, Mastercard and American Express are known as payment networks, they’re basically the computer systems that allow for processing of credit card transactions. They make money off each transaction. As a cardholder, you won’t find big differences between Visa and Mastercard.

However, American Express (Amex) is slightly different. For one, it is not as widely accepted by merchants because of the cost issues. Amex has a slightly higher processing fee compared to Visa and Mastercards. Two, they issue their own cards which mean they determine their own interest rates, fees, and payment schedules (not the banks).

As an overview, some of the benefits with these payment networks include:

• Global Customer Assistance Services 24/7 no matter where you are in the world so you can report problems or lost/stolen credit cards.
• 24/7 Concierge services including helping you to make last-minute dining reservations, flight reservations to name a few.
• Deals and discounts exclusive to your card type
• Globally accepted by millions of merchants around the world so you won’t ever have to worry about not being able to pay with your credit card
• Global ATM network allowing you to withdraw cash when you need it
• Exclusive access to airport lounges, golf clubs, and premier hotel memberships

How do banks make money from credit cards?

Fees and charges: Annual fees, late payment fees, cash advance charges and foreign currency transaction fees are some of the popular items on the menu, courtesy of your credit card provider (a.k.a the bank). Even if you’re someone who always pays their bills on time and has never been charged with interest, banks still rake in a lot of profit from you via an assortment of fees and charges.

Interest rates: Credit card interest is easily bank’s biggest form of revenue, as most of the banks in Malaysia charge an average of 11% to 18% of interest on outstanding balances. Banks especially rake in their income off cardholders who the minimum or late payments, because the more balance you carry forward over a longer period of time, the higher the interest rate will get.

Merchant fees: A lot of people are unaware of this, but the higher your spending power is (in retail purchase), the more profit the banks make. Each time you make a purchase from a merchant, a small percentage of what you pay (usually ranging from 1% – 3%) will go the credit card’s issuing bank as an interchange fee.

This typically doesn’t directly affect you as a consumer, but some small-scale businesses will ask to charge you that 1%- 3% instead, although they are obliged by law to inform you of it beforehand.

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