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In this blog, we had discussed so much of benefits from credit cards. From different kind of cards to how to how to spend more in a wiser way so as to maximise the benefits we ought to receive from every cent we will already spend.
However, it's never easy to fully utilise the game we are in. Credit cards issuers are so good in letting us spend more than what we should. Somehow, we don't even realise it.
Today, we are going to point out 5 things you must never do with your credit card, so that we can avoid these traps set by credit card issuers and our mindsets.
A. Cash Withdrawal
Photo credit to Krungthai Bank
It is definitely one of the most risky benefits offered to all credit card holders. We strongly not recommend any user use this feature, in all case.
Cash withdrawal is indeed a high-interest-short-term-loan from banks. A legal shark loan, what we would call.
Here are the 4 Why-s:
Example from KTC is taken, but it happens to be the same for most banks
Photo credit to Krungthai Bank
1. Compulsory 3% cash advance fee. (Don't forget the 7% Tax)
2. Interest of 15%.
3. Credit line usage fee.
4. No reward points earning.
Take an example shown on KTC website:
Photo credit to Krungthai Bank
From the calculation, it simply shows that a 10,000 THB cash withdrawal ends up paying for extra 380.17 THB in 12 days. (Don't miss out the tax and cash advance fee)
Imagine if this "loan" did not been settled for a longer period.
The question is why would bank be so "cruel" in the fees and interests?
It's not that banks sense the urgency of liquidity from users and considered it's the best opportunity to take advantage of.
The answer is just simply a single word "easy".
Consider that, a loan/ mortgage typically takes days or weeks to approve. As for cash withdrawal, the bank/ credit card issuers lend out money to users as easy as inserting the card to any ATM machine. The risk taken is relatively high since no or minimum documentation required. They would need these policies to protect themselves.
Moreover, it is a risky "loan" since the issuers have no clue where would the cash end up be. It could be drug dealing or any other forms of illegal actions.
As smart users, it is always wise to put all expenses on cards instead of cash advance in the very critical circumstances. The main reason is the penalty of overdue payment for cash advance counts from transaction date. It makes a huge different for that extra 2 or 3 days compared to posting date as you had seen from screenshot of terms and condition. (x2 and x3 for the extra money to be paid)
B. Skip Payment or/and Minimum Payment
This is another horrible acts done by credit card users.
The first rule for fully utilising credit cards' benefits is to spend as how you would have spend. Never fall for high credit limits offered by bank, which is 2 or 3 times more than our monthly income.
As this irresponsible action will lead to our second point of what you should have never done.
Let's continue from the example set by KTC from A.
Photo credit to Krungthai Bank
As from the statement, a month had passed. The user paid for the minimum payment of 1,238.02 THB at the end of September for 10,000 THB cash advance and 2,000 THB retail spending.
The interest and credit card usage fees have accumulated to be 181.60 THB. Keep in mind that this is after deducting the minimum payment. It will be higher if the payment is skipped.
It will be a huge debt if these are not being settled ASAP. A snowball effect will hit the user heavily.
Even if this happened just to earn welcome bonuses or extra points from reward credit cards, it will never worth it.
The penalty fees are what credit card issuers earn, to pay for someone else's reward business class flight.
If the payments are skipped intentionally, the outstanding balances will not disappear. They simply haunt you sooner or later.
C. Instalment Payment
Credit card issuers understand that missing payments could happen when something unexpected happened. Huge discounts or sales for instance.
Hence, most issuers offer various instalment plans for users. To have lower penalty for users who spend more than budget and to assist issuers collect partial of money they lend out. A lost (less)- lost (less) situation.
Photo credit to Krungthai Bank
As advertised by KTC, the interest rate for instalment was 0.80%. But, is it true?
Photo credit to Krungthai Bank
The control variable here is "months".
Take an example for 3 months instalment plan for 10,000 THB offered by KTC.
3,413 x 3 = 10,239.00 THB.
If that instalment plan was taken, the user will end up paying an actual interest of 2.39%. That is actually an additional of 239 THB that should not exist if he/she pay the debt in full.
To up the game, this is applicable for 0% interest instalment plan too. In Thailand, it is typically for 10 months.
When 0% instalment is activated, the full expense will not be shown. Only the credit limit is lowered. While the 10% of instalment billed each month, we will tell ourselves that "I din't spend that much". Psychologically, this action will lead us spending more that we had expected.
D. Pay for unnecessary annual fee
This doesn't mean every credit cards with annual fee are trash. But the ones that don't suit your spending habit or could not be fully utilised and yet still charge for an annual fee.
The most related example I could find is from American Express (Malaysia).
Photo credit to American Express (Malaysia)
The Gold card has an annual fee of 238 MYR, while Green card is 0.
Despite the "Alpha" look from gold card and higher amount of travel accident and inconvenience insurances, the benefits for both cards are the same. Including the multiplier of 2x Membership Reward points.
Users should reconsider if that 238 MYR is worth paying.
E. Direct Debit Setup
Direct debit is actually one of the best way to avoid unintentional miss-payment. But, why would it be on the top 5 list by IPI?
This is a tricky part. The reason behind is that when direct debit is setup, the credit card issuers are authorised to deduct money from our account at the end of every statement cycle.
If there is an overlooked fraud charges on credit cards, it might be time consuming and even effortful to receive a reimbursement, a least for some banks. It might be a trouble if it is a huge amount.
Well, this isn't a big deal for great customer-focused issuers. American Express is a great role model. That might be why the annual fee is worth paying.
Bottom Line
These are just few tips for users, especially beginners not to fall into the traps and even blackhole of credit cards.
Always remember to spend as how you would have normally spend. Do not make any impulsive expense because o having a high credit limit. At the end of the day, we will all taste our own medicine if we don't do it right.
We will only get the full benefits from credit cards when we fully utilise and optimise it.
Control it and don't let it control you.
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