You haven't had a vacation for a long time, you've been thinking of a holiday to your dream destination after months of stressful work, but with a price tag of RM2,000, it seems unreachable. One day, you find a special off-season deal at a travel agent at only RM1,000.
 
With opportunities like these, your credit card can be the most powerful budgeting and money management tool you own. That small but mighty piece of plastic allows you to snap up the things you want when they are on sale -even if you don't happen to have the cash on hand when you run into a bargain. And if an expensive emergency should arise, you can even use your credit card to get a cash advance.
 
But a credit card is a responsibility and, if misused, can get consumers in over their heads.

• Your Cardholder Agreement: No Secrets Here

• Know Your Rights

• Understand Your Responsibilities

• How Interest Works

• How Much Can You Afford?

Your Cardholder Agreement: No Secrets Here

One of the greatest things about credit cards is that there are no secrets. If you've got a card in your wallet, the issuing bank has already sent you everything you need to know about using the card. If you're shopping for a card, issuing banks will be glad to send you the information you need with your application. Then, it's up to you to read, understand, and live by the rules.
 
Remember, READ AND UNDERSTAND THE TERMS AND CONDITIONS of your cardholder agreement, which is essentially a contract between you and the bank.

Know Your Rights

Understand clearly your rights as a cardholder and what sort of protection or liability waivers the issuing bank may provide.

Ask questions such as:

• What is the procedure for increasing or reducing my card's credit limit?

• What happens if my card is lost or stolen and unauthorized transactions are made?

• What protection do I have if the goods or services I paid for with my card are defective?

• Does my card provide any extra or emergency services when I am traveling overseas?

• Does my card offer me insurance coverage when I travel?

Understand Your Responsibilities

As a responsible credit card user, you should understand the terms used by your issuing bank. Among those you're likely to find are the following:
 

 
Miscellaneous Fees

Some card issuers require an annual fee - the amount you must pay to get a card or to renew it every year. Some banks also charge fees for submitting an application, for being late with a payment, for taking out a cash advance, for exceeding your credit limit, or for maintaining a zero balance. Read your statement carefully so that you know all of the terms and conditions.
 

 
Grace Period

This is the number of days the bank allows you to borrow their money interest-free. Grace periods vary, usually from two weeks to 25 days, depending on the bank that issues the credit card. This period is usually applied to new purchases, but only if there is no old balance being carried forward. After the grace period expires, if you haven't paid your balances in full, interest can be accrued from the date of purchase.
 
Some cards do not offer interest-free grace periods, and you start incurring interest from the date of any purchase.
 

Cash Advances

The issuing bank or financial institutions treats cash advances like loans, not like purchases or merchandise. When you take a cash advance, interest begins to accrue differently - sometimes without a grace period and at a higher rate. Check with your card-issuer for cash advance fees and interests.

Interest Calculation

When you use your credit card, the issuing bank or financial institution is really giving you a loan for the amount of your purchases. The bank charges a fee - called interest - for using its money. The credit card company pays the travel agent or the furniture store within a few days of the transaction, and you must begin repaying the loan when your monthly statement arrives in the mail.

All interest charges can usually be avoided by paying the balance in full within the time limit specified on your statement. Check the fine print though, because some banks charge a fee for maintaining a "RM0 balance" or don't have a "grace period".
 
If you choose not to pay all you've borrowed from the bank - banks call that "revolving the balance" - interest will be charged. Obviously, the quicker the balance is paid in full, the less interest is paid. Be sure to learn about the terms and policies of your credit card. Interest rates will vary by card, some may begin charging immediately without any "grace period". Some start charging interest from the date of transaction or the date when the transaction is processed in the system. Others may start charging interest from the date on your statement.
 
Banks use various methods to calculate interest, and it's up to you to learn how your bank computes these charges. Unlike a house mortgage or a car loan, credit card interest can be charged by the day or by the month.
 
If you do not pay the balance in full, interest on the unpaid amount, or revolving balance, will be added to the total amount owed. When this happens, you are paying interest on interest, also called compound interest. Any new purchases you make can be included in the total balance immediately and will begin to accrue interest from the date of purchase. If you have a large balance, paying only the minimum amount each month can be an expensive way to use your credit card.
 
Try to anticipate your credit needs. A few months before the holidays or before you head off on that dream vacation, start paying down your balance by sending in more than the minimum payment. When you begin charging holiday gifts or charging for your vacation, you won't be piling new bills on top of old ones, and there will be less chance of exceeding your credit limit.
 
Be sure to know what your APR (annual percentage rate or interest rate) is, and always include the cost of credit in your budgeting or money management.

How Interest Works

Credit card interest rates are set yearly, but calculated monthly. Some credit card interest may be calculated daily and charged monthly. For example, let's say your card has an APR of 18%. If your total purchase is about RM100, it would cost you approximately an additional RM18 in interest if you choose to stretch your payments over a full year, and you do not charge additional purchases on top of your balance. And if your card "compounds" the interest (a practice of charging interest on the monthly interest accrued), the total interest will be several dollars more than the annual rate.
 
To calculate your monthly interest charge, the bank takes the 18% APR and divides it by 12 months for the year. That comes to 1.5% of the average daily balance for the month.
 
The average daily balance is a method of leveling out the amount you owe, which may fluctuate from day to day because of payment and purchases. The calculations to determine average daily balance sound complicated, but they're really rather simple.
 
In effect, the bank adds together the balance on your credit card for each day of the month, and divides the total by 30, the number of days in the month. For a more complete explanation of how the average daily balance is calculated, see the chart.
 

Yearly Rate = 18%

Monthly Rate = 1.5%

STATEMENT 1

(Based on a RM100 purchase on the first day of the billing cycle)

Previous/beginning balance = RM100

Balance subject to finance charge = RM0

Finance charge = RM0

Payment made 25 days into cycle = RM50

Ending balance = RM50

STATEMENT 2

Previous/beginning balance = RM50

Balance subject to finance charge
(RM100 x 25 days/30 days = RM83.33)
(RM50 x 5 days/ 30 days = RM8.33)
(RM83.33 + RM8.33 = RM91.66 or RM92)= RM92

Finance charge (1.5% of RM92 = RM1.38) = RM1.38

Ending balance (RM50 + RM1.38 = RM51.38) = RM51.38

Let's say you decide to pay the RM100 charge for your dress in two monthly payments of RM50. You receive your credit card statement and see the charge listed. Approximately three weeks after you receive your statement, you mail in your payment of RM50. It arrives at your bank 25 days into your credit card cycle. You make no additional charges and next month's credit card statement arrives.
 
You see your previous balance of RM50, an interest charge of RM1.38, a balance subject to finance charge of RM92, and an ending balance of RM51.38. Meaning the total cost of purchasing the dress, assuming you pay the ending balance in full, is RM101.38.
 

But how did the bank arrive at RM1.38 in interest?
 
If you had paid the RM100 charge in full by the due date on the statement, you would have paid no interest, leveraging the bank's "grace period" - generally 14 to 25 days from the date of purchase. But because you paid only RM50, interest is accrued from the date of purchase using the average daily balance method.
 
So in calculating the average of your account's daily balance, the bank looks at the number of days carrying any given balance. Since your first RM50 payment was received 25 days into the credit card cycle, you carried a balance of RM100 for 25 days (RM100 x 25 days divided by 30 days in the month = RM83.33, the average daily balance for 25 days).
 
After your first payment was received, you then carried a balance of RM50 for the remaining five days in the month (RM50 x 5 days divided by 30 days in the month = RM8.33, the average daily balance for 5 days).
 
If you add both average daily balances from above, you get your balance that is subject to a finance charge of RM92. Therefore, the 1.5% (the monthly interest rate) of RM92 is RM1.38, your interest charge.

How Much Can You Afford?
 

The 20-10 rule makes a good "rule of thumb" for understanding how much credit you can afford. The 20 refers to: never borrow more than 20 percent of your yearly net income (not including your housing or mortgage debt). The 10 refers: monthly payments should not exceed 10 percent of your monthly net income.

Note:

This is intended as an educational guide. The information presented is not intended to advise you of strategies applicable to your specific situation, but rather to highlight issues for your consideration. Therefore, you should always consult your financial or tax advisors.

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