Can Credit Cards Kill You?

Updated: Sep 3

Credit cards, a boon or a bane to our everyday expenditure? Check it out here.


(This article was written in collaboration with Jearn Xiu Lee for Wix Reads)

Credit cards, despite being a thin slice of metal or plastic, is a very powerful tool in this technological age. Allowing you to pay for things with a single swipe, you don’t have to worry about bringing enough cash when going out. Since credit cards can be considered a short term loan, you wouldn’t want to overspend and be charged with a high interest on the unpaid amount as it might also lead you to bankruptcy. In this article, I will be analysing the pros and cons of a credit card and conclude from my standpoint.

Advantages

1. Credit score

Credit score is a number that determine one’s creditworthiness. A higher score would represent that the consumer has a good credit history. Credit history consists of multiple components, the most ones being: payment history, credit history length and amount owed. It is important as it might determine whether you would be accepted on your next loan application, overdraft application or anything that is related to credit.

Since most of the credit score comes from payment history and credit history length, getting a credit card as early as possible would be very advantageous as this would mean your credit history length increases. As for payment history, just spend a little and pay in full by the end of the month and you are building up your credit score just fine.


2. Discounts

Discounts, discounts, discounts, who doesn’t love them? Some credit card providers do make deals with stores to give discounts to consumers. This would enable you to save some money when buying necessities. However do keep in mind as these discounts might just be a motive for people to spend more since overspending is quite common when people see discount. Therefore, don’t fall into the trap of buying things that you do not need.

3. Points on top of points

Most credit cards give points when you spend; these points can also be redeemed for items with some merchants. These points systems can also be considered an incentive for you to spend as it is a small cash-back in some sense.

With e-wallet being implemented nowadays, some e-wallet such as Grab also offers a points system similar to credit card. However, since it is e-wallet and it isn’t connected to the bank, you will have to deposit cash into the wallet. Therefore, you could use your credit card to reload. This enables you to earn points in your credit card when topping up and in Grab when spending. Hence, it’s a “points on points” system.

Disadvantage


1. Annual fees

These kind of fees are quite common among credit cards as it could be considered as a form of income to the issuer, although some issuers actually have no annual fees. Do remember to read the clause properly since some of the issuers state that it is free. There is usually a small clause at the end of the contract stating something like, “Noting that it is only free the first year and not for the subsequent year or those kind of clause behind it.”

These fees should not be viewed lightly as it might cost you a fair bit. Normally, fees tend to be higher for cards that have a higher minimum income when signing up for the card. This may also be how they are able to afford to give free gifts for you when you sign up for a credit card. Since you might just sign up just for the gift and later forget about the card and be charged an amount for the annual fee.


2. Impulsive purchase

This type of purchase tends to happen when you don’t pay using cash. It can be considered a psychological issue as you might think to yourself that, I do have the cash in my bank so it’s all good. In comparison to having limited cash in your wallet, you wouldn’t know when you have overspent.

A research conducted in 2008 mentioned that the pain of paying is somewhat lesser when paid with less transparent payment methods such as credit cards, hence increasing the chances of spending. No one would like to see their wallet to be empty so when you pay with cash, you tend to be more reluctant to make the purchase. As compared to using a card, the cash is still with you but you don’t see any tangible asset going out.

3. High interest on unpaid amount

As mentioned above, impulsive purchases occur more frequently when using credit cards. This can lead to a large build-up of expenses which might be over your budget. Don’t worry though, banks are “so good” that they allow you to pay just a minimum monthly payment. It is more like they are actually killing your finances, since the unpaid amount is subjected to 11-18% p.a. interest rate! This is about 5x of what a FD(fixed deposit) is offering you.

If you were to land yourself in the circumstance where you pay a minimum monthly amount, you might be in big trouble if you keep spending how you have been. Since you would just be accumulating more expenses that are not within your budget, your debt will just keep increasing with compound interest.

As Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.” If you aren’t aware of how badly it’s going to be compounded to, you will have to pay the price. This is probably one reason as to why youngsters often declare bankruptcy.



Although I am not a credit card holder yet, with my knowledge and research on this topic, I believe that credit cards’ advantages outweigh its disadvantages as most of the disadvantages appear to be towards your own discipline. Hence, I believe that you would be able to benefit off a credit card if you can practice good self control.


I am also not a financial advisor so don’t follow exactly what I say but do your own research as well. If you are interested in more finance related blog, click here. To learn more about other subjects, click here.

References:

1. Doi.org/10.1037/1076-898X.14.3.213

2. https://www.imoney.my/credit-card

3. https://www.comparehero.my/banking-finance/articles/guide-credit-score

4. https://www.investopedia.com/terms/c/credit_score.asp

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