There was a time in the not-so-distant past when only high net worth individuals in Malaysia possessed a credit card.

When you caught a glimpse of an American Express card nestled snugly in someone’s open wallet, you knew he or she had made it in life.

Today, who amongst us is not familiar with the ubiquitous credit card? Even teenagers have them.

In fact, students and young employees often find their wallets stuffed with all manner of credit cards these days.

What’s behind the proliferation of credit cards

Simply put, it’s profit. Unfortunately, this profit is not ours but that of the bank’s.

Yes, over the years, banks have discovered a wonderful new revenue stream which is basically interest on the debt you incur when you overspend using your credit cards, and can’t pay the outstanding balance in full at the end of each month.

Come to think of it, it’s a really good deal for the bank, and a really bad deal for the cardholder.

Why you need a credit card

Credit cards offer you convenience. Instead of stuffing your wallet with cash that can easily be stolen by a snatch thief, carrying a piece of plastic is so much safer.

It’s also easier to pay for large purchases using a credit card, and keeping only a small amount of cash in your wallet.

Banks have also structured their offerings in such a way that purchasing items using their credit cards could benefit you in ways that cash purchases would not, in the form of rewards and other freebies.

But let all these plus points not distract you from the potential dark side of owning one or more credit cards.

If you are not a financially disciplined person, or if you have a propensity to overspend, a credit card is like a cigarette to a smoker trying to quit.

When a credit card is not for you…

It is difficult to resist the temptation to swipe a credit card when you’re eyeing that electronic gadget, smartphone, outfit or designer handbag. At the point of purchase, you rarely consider how you will feel when the bill arrives later in the month. All you can think of is your purchase.

And then, a few weeks later when the excitement of your purchase has died down and the bill shows up, you experience that sinking feeling of knowing that you cannot possibly settle the bill in full.

So, you hastily make a payment for the minimum balance repayable, and resolve to be more responsible next month so that you can settle the bill in full.

Only, the same thing happens the following month. And the month after that.

And in the meantime, the interest on the outstanding balance continues to compound, and before you know it, you’ve racked up a huge outstanding balance which you cannot hope to pay off anytime soon.

This is a situation to be avoided at all costs.

Now that you know why you should be wary of credit cards, it’s time to look at how you can use your credit cards wisely.

Checklist for credit cards rationalisation

• First, think about why you need a credit card in the first place. If you don’t really need a credit card, why bother to get one? Use cash.

And if you don’t have enough cash, delay the purchase, or adjust your spending patterns to ensure that you prioritise your cash spend profile more efficiently.

• Assume using cash does not work for you for a variety of reasons. After all, many heads of households with families have no choice but to survive on a combination of cash and credit to make ends meet.

If this is the case, apply for just one credit card and try your level best not to use it.

• When choosing a credit card, compare across the banks. There are different cards out there, each with their own benefits and shortcomings.

Compare cards across banks on sign-up offers, annual fees, cashback options, interest rates, promotions and packages, rewards, petrol rebates, travel offers, balance transfer options and a range of other characteristics.

• Always be mindful of the hidden fees that come with these cards – like the annual fee and various other fees.

Try to negotiate to get these waived before signing-up, or consider the card that offers you the option to redeem your points and set them off against these fees.

• Lastly, remember that having a credit card is a responsibility. Don’t act on impulse.

If you’re an impulsive shopper, it might be safer to leave the credit card at home. If you do possess some degree of self-control, get into the habit of planning your purchases in advance.

Rule of thumb

Make a list of all the items you need to purchase and rank them in order of priority. Only purchase the items you absolutely need, and use cash as much as possible.

The rule of thumb is this – if you can’t afford to pay for it in cash, don’t buy it at all. If you are conscious of the limits of your credit card and use it wisely, you will reap the benefits without suffering from the shortcomings.

This article first appeared in kclau.com

KC Lau’s first book Top Money Tips for Malaysians has sold thousands of copies. He launched the first online personal finance course specifically designed for Malaysians, entitled the Money Automation System. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.