Credit Cards Facts: What You Need To Know

Thinking of getting a credit card? Before you embark on this perilous financial journey, be prepared and get the facts. Below are the typical terms and conditions of owning and using a credit card that you need to understand.

Credit limits

This is the maximum limit set for each card. Once this limit is reached, you can no longer use the card until you have paid part of the cost.
Usually credit card limit is 2 to 3 times your monthly income. If you use the maximum limit, this means you have spent 2 to 3 months of your future income (the money you haven't yet earned)!

Fees and charges

There are various types of fees and charges that you need to understand, including:

• Entry fee - credit card issuer may charge a one-time entry fee. This fee may vary from one card issuer to another.
• Annual fee - This is a fee that must be paid when you receive a credit card. There are also credit card issuers who waive this fee if you meet certain conditions.
• Finance charge - This is a charge imposed on outstanding balance after the due date and is calculated on a daily basis. At this time credit card holders in elevated interest. This is intended to encourage disciplined use of credit cards.
• Cash advance fee - The fee charged each time you withdraw cash from your credit card, and usually between 3% to 5%. In addition, cash advance will be imposed with higher finance charge than normal credit usage.
• Late payment charges - These are the charges if you fail to pay the minimum monthly amount before the specified due date. If you pay after this date, you will not only incur finance charges (interest on the outstanding balance), but also late payment charges.
• Tax services - Starting in 2010, every credit card holder will be charged an annual service tax of RM50 for primary card and RM25 for supplementary card. This fees will be included in your credit card statement.

Interest-free period

You can enjoy an interest free period, usually between 20 to 50 days from the date of the transactions, if you do not have any overdue amount from the previous month.

Therefore, if you only make partial or minimum payment, you will be charged interest on all purchases made by credit card from the date of the transaction is recorded. This means that if your credit card bill is not paid in full by the due date, you will not enjoy an interest free period. Interest will be charged on the next transaction and the interest will be compounded on a daily basis until the balance is fully paid.

Balance Transfer Facility

Balance transfer allows credit card holders to transfer all or part of the credit card balance from one bank to another for the purpose of saving on interest charges. Typically, banks will offer this facility as 'promotion' to encourage you to transfer credit card balances to them. This might be a good move for you to save interest costs. However, before deciding on a balance transfer, ask yourself the following questions:

• How long is the duration the promotional rate?
• What is the effective rate after the promotional rate expires?
• Does this promotional rate applicable for new purchases?
• Will you be charged a balance transfer fee?
• Will you be charged a fee for cancellation or early settlement?

While this may be a good strategy to reduce interest charges on credit card balances that have not been paid, you should also review the terms and conditions of such facilities.

For example, there is a clause that states you can only make a minimum payment of 5% of the amount transferred during the promotional period and you are not allowed to pay more or settle in full. Additionally, there may be a 'lock-in' period that prohibits you from transferring the balance to another bank without paying a penalty first. If you are still using the card that has been balance transferred, make sure you use the card limit balance wisely. This is to prevent you from spending beyond your means.

You also need to comply with the amount and payment schedule that has been agreed. If you fail to make payment, the promotional rate will change to the normal rate of 17.5% together with late charges and other penalties.

Flexible payment / interest-free scheme

This is a facility offered by the credit card issuer and selected merchants whereby a cardholder can pay for purchases in installments ranging from 3 to 24 months without interest depending on the cardholder's credit limit.

Liability of supplementary card holder

The main card holder will be responsible to cover all payments on purchases made by supplementary cardholders. However, most credit card issuers will hold the supplementary cardholder liable if  no payment has been made.