Not everyone should have a credit card, especially people who have a tendency to misuse them because they are not financially savvy or responsible.

People like these can destroy their finances in a short time. But, if used wisely, credit cards can help build wealth.

This article discusses how to be a wise credit card user.

1. Settle all bills on time

The key words are “all” and “on time”. If the credit card bills amount to RM2,000 for the month, settle it in full before the due date.

Making partial or minimum payments means paying high interest of about 18% a year on outstanding bills that are carried forward to the following month.

2. Use less than 30% of the credit limit

Assume someone earns RM4,000 a month. They can apply for a credit card with a credit limit of twice or three times their salary, in this case RM12,000.

The trick is to keep spending at 30%, or RM3,600, of their RM12,000 credit limit. Bankers will view them as conservative in using credit cards, hence, profiling them as a low-risk borrower.

This could be useful when applying for a new loan, be it a car loan, a personal loan or a mortgage.

3. Use the credit card transactionally

Say someone wants to buy a MacBook Pro for RM6,000. If they have set aside enough cash for the purchase, it is fine to use the credit card to enjoy the benefits that are not available when paying cash.

If they do not have the cash, it is best to delay the purchase. But the question arises, “How about using the 0% interest easy payment option that enables users to pay for the MacBook Pro in 12 or 24 instalments?” This brings us to:

4. Think twice before using the easy payment option

It would be okay for the person to spread out the payments for the RM6,000 MacBook Pro in 24 interest-free instalments of RM250 per month if they can make the payments without adding more to the credit card bill.

Credit cards allow people to buy things without having the cash in hand. And if it becomes a habit, and they sign up to pay for more things in instalments, and start paying the minimum charge because they cannot settle the balance in full, their credit card debt could spiral out of control.

So, those who are aware that controlling their spending is not their forte should forget about the 0% interest easy payment option.

5: Be wary of cash advances

Let’s say a bank gives someone a RM12,000 cash advance for using its credit card. It can be settled in six equal instalments of RM2,000 a month. The only thing they need to pay is an upfront fee of 3.88% of the cash advance.

But, if that person accepted the cash advance, instead of just paying 3.88%, they would in fact be borrowing RM12,000 at an interest rate of 13.55% per annum.

How did this happen?

KCLau has a one-hour webinar that demonstrates how to calculate the effective interest rate of a cash advance.

How to be a power user of credit cards

In short, it would be okay for a financially responsible person to get a credit card. It can be used to enjoy the perks that come with its use and they can build a credit profile.

Once one has gained some experience in using a credit card or two, it is okay to get more and become a credit card power user.

This article first appeared in kclau.com

Ian Tai is a financial content machine, dividend investor and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’, and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar with KCLau.com.