Do I Really Need To Own A Credit Card In My 20s?
by Seetha Ravindran. |
I’m sure we’ve been commonly approached by credit card sale executives to apply for a credit card when we're casually window shopping at a mall and our first instinct is to immediately turn down the offer. As for me, I used to think that credit cards are for lavish spending and highly risky for my given lifestyle and I didn't want to end up in debt. Boy, was I wrong.
The 2018 Market Strategies International reported that 80% of credit card users are unsure of what are the purposes and benefits of owning the plastic money. Utilising the perks of credit cards does not always oblige someone with liabilities only. Credit cards can be more than that with research-backed pros and cons. Let’s dive into the benefits.
Available credit when you need it
For most reasons, credit cards act as a quick, short term loan provider. By having one, you can get access to an easily available credit to purchase something. For instance, asking a friend for instant finance could possibly disrupt your friendship. Most of them respond with double ticks only. Another scenario would be when applying for personal finance loan in banks could be tedious with longer processing time. Where else with this ‘plastic money’, you may withdraw up to your credit limit almost instantaneously.
Do take note that a predetermined percentage of interest will be charged on top of the withdrawal amount. For example, 10% of the withdrawal amount to be accrued as the borrowing interest.
Flexibility to Repay
Aside from that, having a credit card gives you the flexibility to repay, be it the amount or the period for the sum borrowed. You have the freedom to decide how much to pay back in instalments depending on the bank.
However, this is one of the common reasons why many people get into debt because of prolonging the payments. The longer you prolong your payment, the higher the interest would become and that's when things go out of hand. You wouldn't want to get a loan to cover back your credit card bills which will end you up in another form of debt. That’s why its’ always important to pay your credit card bill on time!
Help build good credit score over the time
So, what is a credit score?
To make it as simple as possible, a credit score is a numerical value to represent an individual's 'worthiness' to qualify for loans etc.
Having a credit card and paying the balances on time helps build a good repo as it shows user commitment. Paying the balances in full within one month will qualify for zero interest.
Credit scores are calculated by giving weights to payment history, amounts owed, length of history, new credit and types of credit used.
Now you may ask, how do credit card providers earn if we do not pay any interest with prompt repayments? Credit card providers earn big chunk of their revenue in the form of interest, mainly from those who spend big amounts and pay over a long period of time. Keeping up the balance low is a healthy financial choice and keeps the credit score impressive.
Build strong credit history
Having credit cards with prompt repayment also creates a strong credit history. This takes into account whether you are paying the credit consistently and also previous bankruptcies, collection and delinquencies. The more you spend above the credit limit and repay later than the due date, your credit score gets dinged a little.
The perks of having a good credit history would allow you to qualify for favourable terms when applying for car loans, housing loans and insurance. Loan providers potentially look for customers who are diligent and less risky when lending. Thus, saves your money in the long term while paying lesser interest. In other words, it’s pretty much like how you’re lending money to your friend and he/she pays back to you on time without you having to remind them. You’d gain more trust and more willing to lend them money again if they would need to.
Accumulate points and miles
One of the benefits of credits cards is the points accumulation that can be redeemed for future transactions. If you are someone who travels a lot, then you could consider using your credit cards for payments as the miles accumulation can then be redeemed for other items or if you're a frequent traveller, you could trade in for airline tickets, or other benefits-in-kind such as being bumped up to business class, complimentary food and drinks, travel insurance, baggage protection etc. This definitely allows you to get better deals which allows you to save a lot!
Cash back is when the credit card issuer refunds a small portion or percentage of your purchases as rebates. You may cash it out or redeem as discounts for future transactions. Some of the credit cards that offer the best cash backs are Maybank 2 Gold and Platinum, HSBC Amanah MPower, Public bank Quantum Mastercard and many more.
Pro Tip: Always opt for credit cards that offer the most cash backs.
Some of the points that should be carefully considered are:
One of the common misuses of credit cards is the lavish spending done with the comfort of having available credit. When credit cards are used for over the head expenses, the consequences would be to pay a huge portion of the purchases as interest expense.
Keep to only spend what you can fully repay in 30 days or fewer. This could also help maintain the credit score and qualify for zero interest.
Be Wary of Scams
Although most of the credit cards come with benefits, there are certain things to look out for. It is vital to ensure your credit card has Fraud Protection and do not give confidential information to anyone. Be sure to also set a certain limit and direct notification mobile phones for security purposes.
Getting a credit card could be overwhelming. However, both the pros and cons of owning a credit card should be considered together with the class of income. Each and everyone of us spend differently on different things and for different reasons. It's important to know what works for your kind of income and monthly expenditures.
You may find out more about Seetha on her Instagram too.