No Escape From Credit Card Service Tax

For all Malaysians who carry credit cards, looks like your faint hope of the Government withdrawing their decision to charge service tax is in wane! In the light of Government's push for "prudent spending", better act smart now!

If you try to contact your banks these few days, chances are the phone lines could be jammed with traffic!

However, the good news is that you are unlikely to be charged the service tax immediately, as the fee is only payable when new credit card is issued, or upon the anniversary date of the credit card issuance.

For example, if a credit card is issued to a new cardholder on Jan 15, 2010 with a validity period of a year expiring on Jan 14, 2015, a service tax of RM50 would be chargeable on Jan 15, 2010. On the anniversary date of the following years (i.e., Jan 15 for year 2011, 2012, 2013 and 2014), the same amount of tax will be charged again on the respective dates.

For existing cardholders, for cards issued on Sept 18, 2008 with a validity period of five years and expiring on Sept 17, 2013, service tax would be charged on its anniversary date on Sept 18, 2010, followed by Sept 18 2011 and Sept 18, 2012. However no tax will be levied for 2009 given that the policy will only be effective Jan 1, 2010.

Credit cardholders can expect to see the payable amount of service tax in their statement separately.

In the event a credit card is upgraded (such as in the case of a Classic card to a Gold card) or downgraded (such as in the case of a Gold card to a Classic card) or converted (such as in the case of an Islamic card to a conventional card) or reinstated (such as in the case of a cancelled card), the service tax will be charged on the new cards issued unless the anniversary dates of the previous and the new cards are the same,

For supplementary card holder, the amount of tax levied is RM25 per card.

The above tax applies to both credit cards or charge cards, but not on cash cards such as debit cards, petrol cards, closed community charge cards, loyalty cards and e-money like “Touch n’ Go”.

Another piece of good news is that most banks have agreed to allow card holders to pay the service tax via reward point redemption. The estimated point for redemption is about 10,000 bonus point for principal card and 5,000 point for supplementary card. However, the points could vary from bank to bank.

Related Post:- To Cut or Not To Cut?

To Cut or Not To Cut?

For many Malaysians, the first thing that probably comes into mind is the on-going P1 WiMax advertisement that has caused some gender controversies but essentially tried to convince consumers to switch their internet broadband services to the wireless WiMax technology. The latest P1 WiMax technology is supposed to make the experience of broadband internet surfing better and faster, "plug-and-play" with no physical phone line required.



Now that's not what I am referring to. I am referring to the more pressing issue of Malaysia's Government's recent plan to introduce service tax for credit cards from 2010 onwards. To recap, each card holder will be charged RM50 and RM25 for each principal card and supplementary card respectively, starting January 2010. If a person holds 5 credit cards with two supplementary, the total amount could add up to RM300 each year, and that's a big amount to pay for!


Personally, I hold something like 10 credit cards! Well, it's not that I'd like to have so many of them but merely because of the different kind of benefits that each of these cards could offer. For example, some credit card offer 2% rebate on petrol usage, while some others offer better discounts or rebates for supermarket spending, etc. Essentially, the banks have been very creative in rolling out different kinds of benefits to entice consumers to sign up for different credit cards. Since we can't have all-in-one facility, we have no choice but to sign up for these different cards. After all, there is no harm done provided the use of credit cards are not abused.

With the introduction of service tax, the benefits now seem to be muted. Besides the consumers, the biggest losers will be the banks and the sales agents whose livelihood depends on promoting the credit cards to earn a commission!

While the objective of prudent spending appears sound and should be supported, I believe it should not be done at the expense of genuine credit card spenders. The Government should instead impose targeted measures on credit card holders who defaults on payment on a regular basis. For instance, a mechanism to suspend all the credit cards of a particular credit card holder who defaults more than x number of times should be considered. Else, create more incentives for the use of debit cards instead of credit cards instead.

Nevertheless, if you are holding on to many credit cards right now, do not simply cut them apart. Wait for further advice from banks pertaining to this matter. I believe banks are actively pursuing the matter with the Government in order to come up with better measures. With the Government's constant flip-flopping policies, it will not be a surprise if they decide to change it again!

After all, it's also still not too late to make a final decision to cut your credit cards in December, if the situation renders so.

Is Margin Trading Right For You?

Leverage your money. That's what many of us have often been told or practising. However, not all forms of leveraging is good. For example, not repaying fully your credit card bills and servicing high amount of interests is not a good way of leveraging. To sum it up, you need to weigh the cost and benefits of such leveraging and the associated risk before jumping into it. If the cost outweighs the benefits and comes with high risk, such form of leveraging is obviously not for us!

In equity trading, there are generally two forms of account, being cash account and margin account. Cash account simply means you pay cash up front, before purchasing shares. In countries where settlement period (T+x day) is allowed, full settlement has to be made upon the maturity of the settlement period. Margin account, on the other hand, allows an investor to purchase more shares than his cash deposit allows, normally two times the amount. For example, supposed you have $10,000 in cash deposit, you are allowed to purchase up to $20,000 worth of shares. The other $10,000 is like a form of borrowing from you broker or securities firm, in which they will charge you interest (for the amount of borrowing) based on prescribed interest rates calculated on a daily basis.

Effectively, this is a form of leveraging. Question is, is this a good form of leveraging? Let's explore the advantages and the inherent risks.

Quite clearly, margin trading allows you to trade more than what you have, and therefore, allows you to make more money if your share price projection turns out to be correct. However, the same holds true (i.e., more losses) if the share price goes against your direction!

Here's the added risk when the direction of the share price goes against you. When the amount of shareholding falls below a certain predetermined amount (by the broker or securities firm), the broker is entitled to issue a margin call. What a margin call simply means is that you will need to top up the shortfall immediately or latest by the next business day.

For example, supposed you have cash deposit of $10,000 and you have bought shares worth $20,000. Let's say share prices have gone down by $6,000 and you now have $14,000 remaining. Your net cash position now is %$4,000 ($10k - $6k loss). Assuming margin requirement is 30%. you will need to maintain a minimum of $4,200 ($14k * 30%). In this case, there will be a margin call given your net cash position runs below the safety margin.

Failure to top up within the set timeline will render the broker disposing your shares. Worst of all, it can be done without your knowledge!

To further add salt to the wound, your losses could be blown out of proportion as you continue to top up your margin but the market further deteriorates against your expectation!

You need to be also aware that the amount borrowed incurs interest on a daily basis. As such, it is an added cost of investment. As such, there are holding costs should you decide to hold on to a stock.

In conclusion, my advice is do not trade margin account unless you absolutely understood the kind of risk that you are dealing with and is prepared to take on such risk without major adverse consequences. Personally, I do not and will never trade with a margin facility. Simply, it's way beyond my tolerance of risks!

Shall I Accept A Lower Loan Installment?

In view of the current low interest rates environment due to global economic crisis, costs of borrowings have become cheaper and if we were to base on the original loan facility agreement with the bank, the repayment period for the affected loans will be shortened, assuming the same amount of installment were to be paid each month. In some countries, banks are required to voluntarily reduce the monthly installment amount of loans so that the repayment period will not be shortened. In some cases, banks even allow troubled borrowers to stop payment for a specific period of time, or willingly negotiate with the borrower to restructure the terms of loan. The objective of this is simple, that is, reduce the burden on consumers and/or businesses in a challenging time like this.

Some people have sought my opinion whether to accept the reduction in installment amount. My answer to that is why not, even if one has no financial difficulties! After all, one could save a fair amount of commitment each month and assuming one has multiple loans (like myself), the amount of savings each month can be quite sizeable.

There are many advantages reduced commitment can bring to the equation. Among them include:
- excess funds for spending on goods and services. Flow of funds and spending are essential for the growth of economy. An environment without consumer and business spending will just make the already stale situation worse off!

- pay off debts which carry a higher interest rates than one's mortgage loan. Credit card debt is an obvious example. This could lead to significant savings in cost of debt.

- best of all, use the savings from the excess funds to invest wisely. Given that many investment grade assets have been bashed down badly during the past one to two years, great bargains are abundant! For instance, stockmarket is expected to give the best return once the global economy recovers. So for those who have not acquired the knowledge of investing, now is the best time to educate yourself, before it's too late!

Also, keeping extra cash in your pocket at the time of crisis is definitely a wise thing to do. After all, we will not know what may happen next. For instance, job retrenchment, business failure, etc, may just pop up down the road, especially if the economy gets worsen.

One word of caution though, do not expect every bank will voluntarily reduce the installment for you. I know for some banks, you will actually have to write in to request for the reduction. So do not just assume this will be done automatically. Go ASK YOUR BANK now!

Cheaper Credit Card Debt: What You Should Know And Ignore

Here's a piece of good news for Malaysians with credit card debt! The Central Bank of Malaysia have just declared that interest rates for credit cards will be reduced by 0.5 to 1.5% for credit cardholders, while late payment fees will be slashed to a minimum of RM5 and a max of RM75 (against previous fees of RM10 or 1% of total outstanding balance subject to a maximum of RM100) effective from 31 Mar 2009.

To recap, Tier I being cardholders who pay at least the minimum amount promptly over 12 consecutive months, will now pay 13.5% in annual interest, from the present 15%. Tier II being cardholders who pay at least the minimum amount promptly over 10 consecutive months, will now pay 16% in annual interest, from the present 17%. Finally, Tier-III cardholders who do not meet the above criteria will have a minimal reduction of 0.5% from the present 18%.

The reduction in interest rates should give rise to savings for credit cardholders. However, i believe this is merely an act of reducing potential debt default (in view of the economic slowdown or possible recession) instead of increasing consumer spending, as consumers face the likelihood of reduced income or income uncertainties due to job losses and business slowdown.

Nevertheless, the silver lining to this is that nobody should use the credit card as a form of borrowing due to the extreme high cost of financing. It is advisable to pay off such credit debts with lower cost of financing such as personal loan, property loan refinancing or make use of tools such as credit balance transfer to another credit card with much lower cost of financing.

Avoid credit card debt!

U.S. Federal Reserve, the modern Santa Claus

The U.S. Treasury Department initially promoted the US$700 billion financial rescue package approved by Congress last month as a vehicle to buy toxic mortgage assets from banks and other institutions to spur fresh lending. However, in a sudden twist of event, it has decided to change its target to focusing on making direct investments in financial institutions and shoring up consumer credit markets instead. This has certainly rocked the equation and many were questioning the rationale of this sudden change of target, thereby causing immense uncertainties.

Apparently, the original plan never got off the ground and U.S. Treasury Secretary Henry Paulson declared that asset purchases were not the most effective use of the funds!

Hey, isn't he the same guy who advocated the original idea at the first place? A sign of "loss of direction"?

With the other significant root cause of the problem being the sky-diving U.S. consumer confidence, this change of target is therefore aimed to help restore credit flows to U.S. households by using financial rescue funds to lure investors back to markets for securitized debt such as car loans, student loans and credit cards.

It appears that many more troubled banks, companies or industries have started asking more bailout funds from the Fed, as if they are some kind of Santa Claus freely distributing free handouts! The latest being AIG, whose original US$85 billion bailout has now ballooned to US$150 billion, and the U.S. automotive companies also similarly demanding some large sum of rescue funds!

Last but not least, U.S. leading charge card company AMEX has now been granted a Bank holding status, i.e., they are now much more ready to tap into the seemingly "un-exhaustable" Federal Reserve funds!

To the U.S. Government, they will have a busy task to make sure that their money printing machine is not going to let them down by going overtime!

Should You Gear Up or Pay Up?

One common question i always received, is "Shall I gear up on my loan or pay up the loan as fast as possible"? The answer depends. Confused? Well, there is really no real right or wrong answer here.... The answer lies with the risk tolerance of an individual and to a certain extent, age too.

First of all, let's break this down into different categories...For those who are in the 20s and 30s, it probably makes sense to take on a greater risk by gearing up, that is, leverage through loans with longer tenure, with the assumption that you have a regular income and/or reasonable amount of savings, investments or businesses that are able to generate some consistent decent returns. These group of people generally can afford to take on more risks and in the worst case scenario, they have something to fall back on.

On the other hand, people who are more than 40s and approaching retirement age may consider taking on lesser risk. Bear in mind that the maximum lending age is generally up to 65 years old. Basically one should make sure that one is able to continue servicing the loan post retirement. Another reason why i like properties such as high-rise apartments or commercial properties that are able to generate positive cash flows. In essence, the monthly rental is more than able to pay off the loan installments so you don't need to worry about it too much!

Overall, you should review your own financial goals, resources (such as savings, investments and other diversifications) and risk appetite in order to come to any conclusion. eg., if you settle your loan first, you may lose out on other investment opportunities that may potentially give you much higher returns than your loan rates. On the other hand, if investment is not your cup of tea or if you have limited knowledge, then early settlement may be the better choice since it is a sure gain. Also bear in mind that all investments come with risk, so you need to be able to bear the risk if your investment decisions turn sour!

Other things to consider include the economy and the likely interest rate direction. Currently i would consider a good time to borrow since the banks are offering very attractive rates to the extent of BLR (Bank Lending Rates) minus 2, which works out to be around 4.75% (assuming BLR = 6.75%). However, in lieu of the current high inflation, banks may raise interest rates going forward. So, you could risk paying more interests in the future! However, i believe the rise should be negligible since the current inflation is cost driven rather than demand.

Another important element is from a tax perspective, it may not be advisable to settle early since there are certain tax benefits that come with investment property such as tax deductibility on loan interests against rental income. Effectively you will be paying less tax on your rental income. If you have two loans for your home and investment respectively, settle the home loan first.

Last but not least, if you have credit card debts (balance transfer and installment plan not included), you may consider refinancing your current property so that you could use the excess funds to pay off the outstanding credit card debts! Like I always said, never ever borrow money through credit card!

Do share with me your thoughts.

JG8D69D

Credit Card Spenders, It Pays To Pay Up!

Effective 1 June 2008, the Central Bank of Malaysia (Bank Negara Malaysia) will introduce a new Tiered Interest Rate Structure on retail purchases using credit card. This structure has been introduced to inculcate prudent financial management among credit card users. Card users who demonstrate good track record in settling at least their minimum payment promptly will enjoy reduced finance charges.

Currently, all outstanding payment after due date will be charged a standard 18% interests per annum calculated on a daily basis. The banks are therefore often labeled as the "legal loan shark" as a result of charging such an exorbitant high rates! Anyhow, the intention was to deter credit card defaults or using credit card as a debt instrument. However, the results often showed an increasing trend of debts and/or bad debts, which is not the intention!

As for late payment, the current policy is to charge 1% on the minimum payment amount.

On the other hand, interest free period is currently set to 20 days, for card holders to enjoy 20-day interest free period upon purchase.

With the tiered structure, different interest rates will be charged based on past payment track record:

Card users with prompt payments for 12 consecutive months - 15%

Card users with 10 or 11 times prompt payments in the last 12 months - 17%

Card users with 9 or less prompt payments in the last 12 months. - 18%

Sounds good for card holders with prompt payment track record? Read carefully! First of all, the interest-free period for card holders who do not pay in full will be effectively removed! That means, although one may pay the minimum payment promptly but without paying full settlement, all amount from new transactions posted will be charged interest on the day the purchase happens! Secondly, the late payment charge is now set at a minimum of RM10 or 1% on total outstanding balances!

The outcome of all these is that the card holder may end up paying much more interests than before if the person does not settle the outstanding card balance in full!

At a start, paying such an exorbitant amount of interest is not right, let alone paying more!

How is this differ from your country?

How To Deal With Inflation?

With the recent whopping petrol price hike and rising cost of living, here are 18 ideas to tackle inflation and stretch your dollar to the limit...

1. Budget and Plan for your shopping and prepare a shopping list - keep to your budget and do not spend unnecessarily;
2. Monitor prices of shopping list among different locations and opt for the least expensive pricing;
   
3. Buy in bulk or bigger quantities - generally comes with bigger savings. However, make sure there is no wastage;
4. Buy generic or household brands - they are generally cheaper due to savings passed on to consumers due to zero advertising;
5. Buy local goods instead of imported goods, unless it's absolutely necessary due to for instance, better feature and/or safety;
   
6. Time your purchase during special promotion period - this is particularly applicable for non-essential items such as clothing and electrical;
7. Less dining outside and more dining inside - cook at home will save you money from dining at fancy restaurants;
8. Look out for loyalty programs and earn reward points while shopping - save on loyalty programs (such as petrol card where certain amount of rebates given in return for petrol pumped) and convert the reward points to free merchandising;
9. When dining out, try avoiding places which charge additional service charges and/or taxes;
10. Pick lunch over dinner when dining out is necessary - lunch time typically offers better set-lunch prices;
11. Plan your journey, especially when involving multiple locations - save on making duplicate trips and better planned journey;
12. Choose a nearer local holiday destinations where driving a car is necessary;
13. Choose an appropriate mobile phone call package that suits your lifestyle. eg., prepaid vs postpaid;
14. Consider to switch or replace your car with a fuel-economy vehicle;
15. Consider on-line banking and online utility payment - save on petrol and time;
16. Cut down on utility consumption such as gas, electricity and water;
    
17. Refinance your real estate property - take advantage of lower interest rates of repayment. For the more savvy investors or business people, the surplus cash (from refinancing) can be applied to investments with better return and/or working capital. Caution - this is only for people with the right discipline!
18. Choose wisely - Go for better alternative credit card debt instruments such as Balance Transfer and/or personal loan which carries a much lower interests. Do not go for the normal credit card debt that charges as much as 18% p.a.!
19. Make you money grow faster than inflation! There's no better than Save and Invest!
    

Do you have other ideas to tackle inflation?

I Love Credit Cards!

Do you know that credit card can be a great personal wealth management tool? I mentioned before the benefits of credit card, as long as you don't abuse it, it actually offers lots of goodies! Think about it this way, where on earth can you get an interest free "loan installment" without the hassle of submitting application form, engaging legal procedures, collateral or a guarantor to secure the credit? Credit card of course! Banks are so innovative these days that some of them are offering installment terms from 3 to 36 months interest free! This is really great especially for big ticket items that you plan to purchase (as long as is essential, of course). Imagine the amount of money saved and available for investment return. However, you need to be careful here....just because it's easily available, you should still have a plan that allows you to settle the installment on a monthly basis. Never partially settle your monthly outstanding balance! Keep these principles in mind:

- alway settle in full all monthly outstanding balance.
- have a plan to settle your spending before committing to any purchases
- keep only about 2 to 3 credit cards. Too many can be a burden in managing your spending and worst of all, it could affect your credit rating with the central bank!
- go for credit cards without annual fees. There are many free-for-life credit cards these day as a result of competition!

Not forgetting, ultimately you could also enjoy a nice rewarding gifts for yourself or family from the rewards program. Cool!

Is Credit Card Good or Bad?

I am sure some of you have heard this before....that credit card is bad for you and all it does is to encourage unnecessary spending! Afterall, it is so easy to just sign away your credit card on the dotted slips without any real money going out! For some people, they even use credit card as a debt instrument, meaning they will settle the minimum amount on the outstanding balance every month (because the rule was set by the Banks!) and pay back the outstanding card balance over "installments"! This is an extremely bad practice as you will soon realize that the real value of your money deteriorates very quickly, due to the fact that credit card companies charge very high interests per annum (eg., 18% in Malaysia) for the outstanding balance amount! In fact, this is worse off than borrowing money through personal loan or overdraft!

So, does that mean that credit card is bad and you should start discarding all your cards and pay everything in cash? Of course NOT. Credit card is good as long as a person uses it appropriately. Here are the major benefits:

1. earn reward points for free product redemption (this is the obvious! However, bear in mind that you probably have to spend 5-figure sum in order to earn a free toaster!)
2. defer your payment (and earn interest savings with your money elsewhere)
3. you don't have to bring loads of cash in the pocket and risk losing them especially if you are buying a big ticket item
4. loads of incentives offered by credit card companies such as interest-free installments, balance transfer, collateral free personal loan, etc.