A newspaper ad screams “enjoy 0% interest with our 12 month installment plan”. Suddenly, to a young, fresh graduate, buying a RM3000 DSLR camera doesn’t seem like an impossible task anymore. Now, we are not just talking about the elite youngsters who are born with a silver spoon in their mouths, we are talking about common youngsters like you and I. Yes, all the luxuries that our parents had to save up for in the past, we can obtain instantly thanks to the credit card.
Its heartbreaking to see young people full of potential in life entwined in insurmountable amounts of credit card debt. They end up servicing their debts with their salaries month in and month out.
If we want to change the world, we need to be good stewards of our finances. If we can’t be good stewards of the little that we have now, how can God entrust us with more to bless the people around us?
With that in mind, I decided to have a little chat with Mr. Richard Tan to get some insight. Mr. Richard Tan is the Director of the HSG Global Ministries, who has a vast experience in the banking industry. Here, he shares not only his views on young people and credit cards; he also shares his personal testimony and experience on how he got out of credit card debt.
How long have you worked in the bank and what is the current position that you are holding?
I had worked in a bank for 35 years – starting from clerk all the way up to manager level
Do you know of many people who are caught in credit card debt?
Yes, we have plenty of people who can’t pay up their debts. What is worse is usually these people only pay 5% of the outstanding balance not knowing that the interest alone would eventually kill them financially.
Normally what is the age group of the people who are caught up in credit card debt?
At one point of time, many young people were caught up in credit card debt because credit card companies were just giving the cards out to young graduates. For instance, some graduates who are only earning RM1200 a month, have a credit card with a limit of RM5000. Many young people were using the credit card to buy thing that they cannot afford and not long after that, they realize that they are using their monthly income to pay off the debts month after month.
What goes through the mind of these people when they are purchasing items with their credit card which they normally will not be able to afford?
Most of they time, all they think that all they have to do is to pay only 5% of the outstanding not knowing the exuberant interest rates that they are being charged. Unless they have a lump sum of money coming in, for instance bonuses which can be used to pay off the outstanding limit, they will find themselves in debt perpetually.
Perpetually means…
In other words, every month they end up paying their debts. For instance, you only earn RM1000 a month and you have an outstanding bill of RM5000, how are you going to pay that off? You have to take care of the payments for rent, bills, food etc. If you pay your entire salary to pay off the debt, you’ll die of hunger that month. So, you end up only paying around 10% of the outstanding amount which in this case is RM500 which itself is not a small amount. On top of that, the interest rate is very high and it keeps accumulating, in the end you only service the interest and you end up paying much more than the amount you borrowed initially.
If you cannot afford to spend, don’t spend future money because you don’t know what is going to happen. What if you can’t get a job or lose your job? What is going to happen to the debt?
The best thing is to spend within your means.
Its easier said than done because I’ve went through that road before. Many times I had to pray and ask God to bail me out. God has already bailed me out. In my opinion, we should try not to use credit card to pay for items that we can pay for with cash.
What about purchasing goods by monthly installments with 0% interest?
It might sound attractive, but picture this : You bought a phone using the 0% installment plan which you only need to pay RM85 per month. What if an emergency happens that month and you do not have that extra cashflow to pay off the installment. You will go into default, and the next month you will need to pay for two months, and if you still can’t pay for it, the following month you will need to pay for three months. Pretty soon, you will realize that you are way over your head with debt. Why don’t you save RM85 per month and after 12 months you get the phone?
How about using the points which is given by the credit card company for our own advantage?
Well of course you can do that provided you pay off the outstanding amount by the end of the month so that you don’t get charged interest.
So at the end of the day, it just boils down to avoid being charged interest?
Yes, because the interest rate for credit cards is very high*. During the time when I was caught in the debt trap I had paid a hefty share of interest.
Is there any good one can get out of credit cards?
No doubt having a credit card on you is good especially if you are travelling overseas.
What are the other credit card traps that one should look out for?
Balance transfers. What happens is some people spend an X amount on a credit card A. When offered a balance transfer, they transfer you entire X balance onto credit card B. With no more outstanding balance on credit card A and the credit limit is free, they start to swipe with credit card A again soon when they find that credit card A has ran out of credit limit, they’ll transfer the entire balance to a third credit card C and the vicious cycle continues. Soon they realize that they have 5 credit cards with an outstanding debt of RM25k!
You did mention earlier that you had been in credit card debt before, how did you managed to get out of it?
I had to discipline myself from using the credit card unnecessarily. My wife used to say, if you don’t have money don’t buy. I also prayed very hard and had to rely on God during those times.
*Standard interest rates for Visa & Mastercard is 1.5% per month. This will vary depending on the bank of choice and might be reduced if one is proven a good paymaster.
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