The RM50 Service Tax for Credit Card Holders: 12 Reasons to Help You Answer the “So Should I Cancel My Credit Card or Retain it?” Question

The RM50 Service Tax for Credit Card Holders: 12 Reasons to Help You Answer the “So Should I Cancel My Credit Card or Retain it?” Question

Although the Budget 2010 for Malaysia was announced last year, the implementation of the RM50 service tax for credit card holders has remained an interesting point of discussion and contention with many Malaysians having more questions than answers. The big question being raised was: ‘So should I cancel my credit card or retain it?’

In this article, we will take a closer look at the strongest reasons for and against owning a credit card. By the end of this article, you should be able to weigh the pros and cons of having one, multiple or no credit cards and then make a decision on whether to retain or cancel your own credit card(s).

THE PROS

• Pro: Credit cards can be used for emergencies. For example, if you seek treatment at a private hospital, often times the hospital will insist on payment up front. This is when a credit card can bail you out.
• Pro: A credit card is easier and more practical to carry around then cash.
• Pro: Your credit card company will be desperate to retain you as a customer, so they will probably offer you lots of new bonuses, rewards and incentives to keep your card. Some banks even implement the accumulation of rewards/bonus points as a method for paying the credit card tax.
• Pro: Credit cards enable you to purchase items electronically. If you are familiar with online shopping, you will know that one of the most widely accepted forms of payment is via a credit card.
• Pro: The auto-debit function for credit cards allows you to manage and pay all your bills conveniently from home. Not everyone has time to go and settle their bills at the post office/collection centre/bank/etc.

THE CONS

• Con: Failure to manage credit card debt properly can result in many problems, including bankruptcy. A study on spending habits conducted by a major bank in Malaysia showed that only 28% of Malaysians stick to a budget while the Department of Statistics Malaysia states that up to 50% of Malaysians who declare bankruptcy are under the age of 30.
• Con: If your credit card or PIN number falls into the wrong hands, you could rack up a huge debt before the credit card company even realizes what is going on.
• Con: You earn better rewards only by spending more. This means that the more expensive the reward, the higher your expenditure. You could feel pressured to spend more money when you are close to earning your desired gift and eventually end up with a huge burden of debt.
• Con: When you swipe that card, you are using money that you don’t have yet. This will give you the illusion that everything is affordable, justifiable and within reach! You even end up buying things that you don’t need.
• Con: If you don’t use your credit card often, you will waste RM50 annually on credit card tax, plus whatever other charges the credit card company imposes on you. ‘Free for life’ usually has its conditions so if you only use your credit card once a year, consider cutting up that card.
• Con: Charging an interest rate is how the bank makes money off you. The average interest rate charged on a credit card is 18% per year. Therefore, the longer you take to pay your credit card debt, the more you owe the bank!
• Con: Possible fees and charges – Take note that your bank or credit card company will ALSO impose a late charge (and other charges) on you should you fail to pay up within the stipulated time frame.

Conclusion

Using the pros and cons that we have discussed, the ‘So should I cancel my credit card or retain it?’ question should now be easier for you to answer. Whatever your decision, bear in mind these ‘Golden Rules’ when using a credit card:

• Read and understand the fine print. Avoid cards with annual fees or other unnecessary payments. Be cautious of annual fees with ‘strings’ attached such as ‘No annual fee charged only if you spend RM500 monthly on petrol/groceries’.

• Carry only one credit card for emergency purposes, and remember to check the interest rates charged before you sign up.

• Make sure you settle your credit card bill as soon as possible every time.

• Set a personal credit limit for yourself. By setting a reasonable spending limit on your card based on your salary and expenditure, you can avoid getting into major debt trouble compared to someone who doesn’t set a limit.

As long as you consider all the pros and cons as well as remember the ‘Golden Rules’ when making your decision, you should be able to remain free from financial stress caused by the credit card service tax or credit card debt!

© Securities Industry Development Corporation 2010. For more information on wise investing, log on to Malaysian Investor (www.min.com.my)
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