CONSUMER CREDIT

February 14, 2011

1.0 Introduction

From the topic studied, the definition of credit is the trust which allows one party to
provide resources to another party where that second party does not reimburse the first party
immediately (thereby generating a debt), but instead arranges either to repay or return those
resources (or other materials of equal value) at a later date.

On a simpler note, credit is borrowed money that you can use to purchase things you
need when you need them and then repay the funds back at an agreed on time. On the other hand,
the customer credit can refer to use of credit for personal need except on the home mortgage by
individuals or families. Many reasons why people want to borrow are to pay for goods purchased
without using cash immediately. When there is an item they want to purchase, but the salary is
not yet due, they can opt to use a source of credit.

Next they were enabling to acquire expensive assets. It will happen by making a loan,
customer can acquire expensive assets such as a house or a car through a loan with the bank.
This would help them own them without having to pay in full amount. Lastly during emergencies
for example, during unexpected events, such as sudden unemployment or accidents, consumer
can obtain for credit.
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February 14, 2011

2.0 Types of credit

Credit card can be divided into two types that is closed end credit and also open end credit.

2.1 Closed end credit

Closed end credit is used for a specific purpose and involves a specific amount.
For example, automobile loans, mortgage loans, installment loans for purchasing
furniture and so on. With closed end credit, we as the user for this type of credit needs to
pay back one- time loans in a specified period of time and in payments of equal amounts.

In addition, closed end payments plans usually involve in written agreement for
each credit purchase. In general, the seller holds title to the merchandise until the
payments have been completed.

Other than that, closed end fund also can be divided into three types like
installment sales credit, installment cash credit and also single lump sum credit. Firstly,
installment sales credit is a loan that allows the users to receive the merchandise, usually
in high- priced items such as large appliances or furniture. The user or customer need to
sign a contract to repay the balance, plus the interest and service charges, in equal
installments over a specified period.

Next is installment cash credit. It is a direct loan of money for a personal purpose,
home improvements or vacation expenses. The user or customer actually doesn’t need to
make down payment and only make payments in specified amounts over a set of period.

Lastly, single lump sum credit is the loan that the user needs to be repaid in total
on a specified day, usually within 30 to 90 days.
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February 14, 2011

2.2 Open end credit

An open end credit type is whereby loans are made on a continuous basis and the
users are billed periodically for at least partial payment. For example, credit card issued
by department store, using bank credit card (Visa, Master-card) making purchase at
different stores, charging a meal at restaurant and also overdraft protection.

In addition, a user also doesn’t need to apply for open-end credit to make a single
purchase. Other than that, a user also can make any purchases that they wish if they not
exceed their line of credit (maximum dollar amount of credit that the lender has made
available to the user). The user may need to pay interest, a periodic charge for the use of
credit or other finance charges.

Next is incidental credit is a credit arrangement that has no extra costs and no
specific repayment plan. Users actually have an option to pay bill in full within 30 days
without interest charges or to make set monthly installments based on the account
balance plus interest. Many banks extends revolving check credit (bank line of credit),
this is a prearranged loan for a specified amount that can use by writing a special check.
Repayment is made in installment over a set period. The finance charges are based on the
amount of credit used during the month and on the outstanding balance.
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February 14, 2011

3.0 Sources of consumer credit

Credit occupies a prominent place in commercial affairs, undertaken by many people. It

provides an opportunity to avail the benefit of purchases of goods and services, without giving
the required money upfront. Here are some of the sources of consumer credit.

3.1 Bank

A bank is a financial institution which is licensed by a government, and plays the

important role in lending money. They also act as important players in financial markets
and offer financial services like investment funds. Besides the credit cards provided by
banks, which can be used for cash advances, many banks offer a variety of consumer
credit services like loans with or without collateral, for major purchases such as
automobiles and home mortgages.

They also provide credits for taking a vacation, investing in a business, paying off
another loan, or a myriad of other purposes. These credits can be paid back to the bank in
the form of installments. However, while giving credits, the banks are rather selective and
look out for individuals and businesses with established credit histories
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February 14, 2011

3.2 Brokerage Firms

A brokerage firm deals in trading of stocks, and executes the purchase or sales of
it. They are a useful source of consumer credits. The provision is for investors who have
securities on deposit in a margin account and the maximum amount that can be used as
credit, depends upon the market value of consumer's securities.

Sometimes additional collateral is required from the consumer's side, if the value
of securities in the account declines. Money borrowed against securities can be used for
any of the purposes including investment in a business, or payment of another loan.

3.3 Credit Unions

A credit union is a cooperative financial institution, which is owned and

controlled by its members, to accept savings and grant loans to the other members. It is
operated for the benefit of its members by promoting thrift, providing credit at reasonable
rates, and providing other financial services. Some credit unions help in community
development and range from small voluntary organizations to bigger institutions.
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People who qualify for membership in a credit union, are supposed to purchase its
share, in order to activate their membership status, and gain benefits from the financial
services which are offered. The operation of credit unions is almost similar to that of
commercial banks, providing almost every type of consumer credit. The interest rates
offered by credit unions may be slightly lower as compared to the commercial banks,
however, the maximum loan amount may not be as large as provided by the latter.

3.4 Insurance Companies

Insurance, is a form of risk management, which is primarily used to hedge against

the risk of a contingent loss. An insurance company is an entity which sells the insurance,
whereas a policyholder is the one who buys it. Insurance companies are a source of credit
for consumers in case he owns policies that include a savings component, or cash value.

Life insurance loans carry relatively low interest rates as compared to that of
loans from other lending institutions. Utilization of insurance companies as a credit
source, actually involves borrowing one’s own money. Any outstanding loan amount is
deducted from the policy's death benefit, in case the policyholder dies without paying
back his credits.
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February 14, 2011

3.5 Finance Companies

Consumer finance companies basically deal with making installment loans and
second mortgages. They offer consumer loans and financing for all purposes, and are
generally more willing to make relatively small loans which commercial banks frequently
avoid. They can be beneficial for some people as they do not take deposits, and can
approve loans for applicants with bad or no credit histories. However, the interest rate
charged by them is considerably higher and dependent on individual’s credit file. If the
applicant is having a bad credit profile, greater amount of collateral may be required by a
finance company, for the approval of a loan.

Before approaching any of the above mentioned financial institutions for a credit,
one should be sure of his needs, and should plan out the mode of repayment beforehand.
It helps the consumer to avoid the hassles which occur on the non-repayment of credits,
which may also spoil his credit history.
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4.0 Applying for credit.

When we are ready to apply for credit, we should know that the creditor only think on
important part in deciding whether you are creditworthy or not. Nevertheless, you also should
know the legal and act that required in applying the credit.

4.1 Credit Evaluation Process (5Cs Analysis)

The principle of the 5 Cs of credit is to establish the creditworthiness of a

borrower. The concept if correctly applied seeks to evaluate the key criteria of repayment
ability, by analyzing the stream of cash flows, the character of financial discipline, the
financial health of the borrower and other qualitative factors.

4.1.1 Character

The character of the borrower indicates two things: the ability to pay
versus the willingness to pay. The ability to pay refers to the borrower’s financial
credibility to pay. A good character is one that has the ability to pay and a
willingness to pay. The lender should check on the borrower’s character.

4.1.2 Capacity

Capacity refers to the sources of repayment, for example the cash flow,
salary statement or other sources of income. The borrower must be able to meet
all his financial obligations on the due dates.
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4.1.3 Capital

Capital represents the degree of commitment and the ability to sustain this
commitment during bad times. Commonly, when there is a greater capital, there
will be a greater ability to repay the loan.

4.1.4 Collateral

Collateral is the lender’s second line of defense. If the payback is derived

from cash flows, then the collateral will not be liquidated for repayment.
Collateral must be a valuable asset and can be reselling quickly for example land.

4.1.5 Conditions

Condition refers to the macroeconomic environment. For example, if the

loan is needed for setting up a retail business in a particular area, then the lender
must make a study of the economic conditions. It is the degree of propensity to
spend by residents in that locality.
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4.2 Requirement for applying credit card

I. Malaysians and expatriates with a minimum annual income of RM30,000

II. Principal cardholders: those between 21 to 65 years old
III. Supplementary cardholders: at least 18 years old

4.3 Required documents:

I. Copy of NRIC (both sides) or Passport, including that of supplementary

applicant's
II. Latest BE form with official tax receipt 
III. Latest 2 months' salary slips
IV. Latest 3 months' savings account activity/current account statements
V. Copies of Business Registration 
VI. Latest 3 months' Bank Statements
VII. Letter from employer confirming duration of employment contract in
Malaysia 

4.4 Laws and Legal Regulated

There is a variety of consumer credit available in Malaysia provided by the

various types of financial and other institutions. Some forms of consumer credit are
subjected to the legislative controls while others may lie within the certain area or are
totally not subjected to any regulations at all. There are a few laws that govern some
forms of consumer credits in Malaysia but different authorities administer laws. These
following laws are including Hire-Purchase Act 1967, Moneylenders Act 1951,
Pawnbrokers Act 1972, Banking and Financial Institutions Act, 1989, and Islamic
Banking Act 1983
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4.5 Benefits of credit card:

Firstly, they will enjoy a low Finance Charge of 9% p.a. on your outstanding
retail balance, and save up to RM730 a year. All you have to do is promptly settle your
minimum payment of 5% or a minimum of RM25. Based on RM2, 950 monthly spend
with minimum repayment of 12 months.

Next is 5 times membership rewards points for every Ringgit spent on groceries,
petrol, Cathay Cineplexes, bookstores - Kinokuniya, Borders, Times and MPH - and telco
charges via Express Autopay - Celcom, Digi, Maxis and Telekom.

Thirdly, is earn up to RM588 a year* if you spend an average of RM2,950 a

month (RM300 on petrol, RM600 on groceries, RM150 on phone bill, RM150 on
bookstores, RM100 on cinema and RM1,650 on others).

Forth, are 2 times membership rewards points for all spend elsewhere. Last but
not least is lifetime fee waiver with complimentary supplementary cards.
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5.0 Hidden fee and financial charges.

One way of credit card companies and banks make a profit is by charging customers for
the privilege of borrowing their money. Any additional fee added to the original amount of a
loan can be called as a finance charge. Credit card finance charges come in a variety of rates.
Unlike a fixed or adjustable rate loan, credit card companies impose different finance charges for
different activities. Function of finance charges is to generate income for the credit card
company. It is understood in the manner of applying different interest rates to the variety of
activities which are permitted by the customer account.

5.1 Types of hidden fee and financial charge

5.1.1 Joining fee

Some credit card issuers impose a one-time joining fee for credit cards and
the fee varies depending on each issuer.

5.1.2 Annual fee

This is a flat fee which you pay annually once you've accepted the credit
card. Therefore, bear in mind that this fee is still applicable regardless if you use
your card or not. Fees may range from RM60 to RM90 for a classic card and
RM130 to RM195 for a gold card.
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5.1.3 Interest charges

Charges imposed on the outstanding balance which have not been paid
after the payment due date. These charges are usually calculated on a daily basis.
With effect from 1 July 2008, interest charges will be on a tiered basis based on
the repayment record of cardholders. The intention is to encourage and instill
good financial discipline amongst cardholders

5.1.4 Cash advances charges

Fees charged ranges from 3% to 5% of the total cash advanced. This fee is
in addition to the finance charges imposed on the amount of advance given. The
finance charges calculated from the transaction date or when the amount is posted
to the credit card account.

5.1.5 Late charges

A charge imposed when we fail to pay the minimum monthly payment by

the due date. The charges can be as high as 1% of the outstanding balance, subject
to a maximum amount of RM75 while the minimum amount is RM5
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5.1.6 Teaser Rates

The biggest culprits of hidden credit card costs come in the form of teaser
rates. You probably get these offers in the mail all the time trying to lure you in
with a low, or even 0% interest rate. While these appear to be good deals, these
rates never last. Typically the teaser rate will only last a few months, and
occasionally up to a year.

Before signing up for any card with a low rate, read the fine print to find
out what the standard rate will be once the teaser rate period is up. These offers
almost never clearly promote the standard rate, so you’ll probably have to look
through the full terms to find out.

5.1.7 Balance transfer fees

Move the existing credit card outstanding balance to another just to get a
lower interest rate. This is another tactic that credit card company use is to offer a
very low or 0% rate on balance transfers. This can certainly be a good thing to do
if you’re stuck with a balance on a card with high interest, but you still need to be
careful. The balance transfer may come with a fee upwards of 3% of the balance
you transfer, a time limit on the low rate, and possibly even another higher rate on
new charges.
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5.2 Ways to Avoid Financial and Hidden Cost

Firstly, make a budget with our income and expenses detailed. Knowing how
much money that available each month to pay toward the credit cards can avoid finance
charges.

Next is, prioritize credit card payments according to interest rates on each card and
total balances due. Pay more money toward the highest rate credit cards first to avoid the
biggest finance charges being imposed.

Thirdly, pay credit card bill by the due date, allowing time for the payment to be
credited. Credit card companies may not process payments immediately upon receipt, so
sending payment one week in advance or scheduling your payment online to be sent one
week in advance. Its can help us to avoid periodic finance charges and late payment fees.

Next is, contact the credit card company to ask about waiving the finance charges. If
we are not able to pay the full amount due on a credit card that is accruing interest, and if
we have a good credit history with the credit card company, they may be willing to forgo
any finance charges.

Last but not least, consider transferring the credit card balances to a credit card
that offers zero percent. To avoid finance charges, apply for a new credit card with a zero
percent promotional interest rate on balance transfers and transfer the remaining balance
to the new credit card.
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6.0 Advantage of consumer credit card

6.1 Convenient to shop

Credit card is very much convenient to buy anything anywhere. If you are on a
shopping spree and want to buy so many things at different shops in a market, credit card
will be convenient enough for shopping. If it is on-line shopping then, credit is the best.
Some online stores only accept credit cards for payments. If you are in foreign countries,
you can make purchases with the credit card without having to worry about local
currency.

6.2 Meet emergent needs

In case of emergency, credit cards can be an extremely helpful. If you are short of
funds and need money, the credit card will provide you the required amount. If you are
away from your place or on a trip to some city and you have inadvertently emptied your
pocket, there the credit card will act like a friend.
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6.3 Keep record of your expenditure

Your spending on the credit card will give a statement at the end of a month,
stating the detail on your expenditures. You need not keep record daily to know about the
spending. Credit cards can also keep you under limit in expenses as you cannot spend or
borrow beyond the credit limit. It will remind you on spending.

It is secured to carry credit card: It is not secured to carry a large amount of cash.
If you lose your cash, you cannot retrieve that. If you lose a credit card, you can
immediately inform the card company to cancel the card. You can have another card in
few days. If you are traveling, whether in the town or country or outside the Malaysia, it
will be convenient to carry the card instead of cash.

6.4 Benefits

Credit card providers offer various lucrative offers like cash back on purchases,
rebates on products you buy on the card, additional warranty coverage for the items you
purchase, travel concessions, various insurance covers, etc. Some credit card offers free
air tickets, free hotel accommodations to the card users.

6.5 Balance transfer

With the credit card, you can transfer your balance from a card with high interest
rate to a card where the APR is 0%. There are many card companies who offer 0% APR
for the starting six to 12 months. You can take the benefits of the promotional periods.
You can save hundreds of dollars by balance transfer.
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6.6 Can build good credit history

You can build a good credit rating if use credit card judiciously. If you have good
credit rating that will help you later in your life. You can take loan easily. Financiers will
believe you if your credit rating is good.

6.7 Improve the standard of life

Credit card can improve your daily life. Your life will be easy enough if you are
using the card judiciously. What you have to give is the payment at the end of the month
and not every day for every purchase.

However, if you misuse your credit card you may fall under the debt trap. Credit
cards should be used properly and seriously.

There are lots of financial organizations in the Malaysia providing credit cards.
Some of the most famous among them are Maybank, RHB, Public Bank, HSBC, and
Citibank. They offer different types of credit cards for different categories of people. If
you are a business person and want credit cards which can facilitate your various business
transactions, go for a business credit card. Likewise, there are student credit card,
entertainment card, store card, gas card, airlines card, etc.
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7.0 Disadvantage of consumer credit card

There are many disadvantages to credit cards. Despite the convenience consumers rely on
the cards for, they come with high costs and the risk of accumulating unmanageable debt for the
consumer. Here are some of the main reasons why credit cards should be avoided, the main
disadvantages that come with credit card use.

7.1 High interest rate charges

Some credit cards come with a high interest rate. If you are carrying a balance
month to month, this can end up costing the customer more. The higher
the interest rate of the credit card you are carrying a balance on, the higher the minimum
monthly payment is going to be.

7.2 Easy to get in debt-early bankruptcy

Credit cards can get consumers into trouble. When most people use a credit card,
they are not thinking about when they are going to repay the meal out for family or the
new outfit for the weekend. No, these customers are thinking of the short term gains.
Experts have theorized that this is the quickest road to credit card debt. Too many
customers fall into the trap of using credit cards to cover the shortfalls in their income.

When this happens, the customer can be faced with thousands of dollars in credit
card debt, on multiple credit cards. To avoid this simply use the credit card for only what
you can afford and be sure to cover shortfalls in income by creating new income. When
these customers are carrying a balance from month to month, they can end up paying
double the price of the item when it comes to interest and financing charges.

7.3 Outspending
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The biggest disadvantage of credit cards is that they encourage people to spend
money that they do not have. Most credit cards do not require to pay off the balance each
month, so even if only have RM100, may be able to spend up to RM500 or RM1,000 on
credit card. While this may seem like 'free money' at the time and will have to pay it off
and when the longer the time is, the more money will owe since credit card companies
charge the interest each month on the money that have borrowed.

7.4 Credit Card Fraud

Like cash, sometimes credit cards can be stolen. They may be physically stolen or
someone may steal the credit card number from a receipt, over the phone, or from a Web
site. Unlike cash, if realize that when credit card or number has been stolen, next thing to
do is report it to the credit card company immediately then it will not be charged for any
purchases that someone else has made. Even when do not realize the credit card number
has been stolen sometimes you might not know until you receive your monthly statement
and most.

8.0 How to prevent Fraud

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First, if you lose your card or wallet, report it to your credit card company
immediately. When you receive your credit card, always check the card in your name.
Destroy the old card by cutting it. Make sure the chip and magnet’s strips portion is
completely damaged. Next don't loan your credit card to anyone and only give out your
credit card information to trusted companies or Web sites.

Third, check your statement closely at the end of each month to make sure all
charges are yours. Then when using your retail card at retail store, protect your card as it
was cash and to ensure that it is in your possession at all time. Check the charge slip and
its amount. Fifth, notify the bank for any changes in address. Safeguard your personal
identification number pin. Last but not least, when making online purchase, only gives
your credit card details on reliable website and companies that you are trust.
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9.0 Conclusion

Consumer credit is necessary as an individual has limited amount of money as a resource

to purchase. Credit enables him to expand his immediate consumption by increasing his
purchasing power. However, there are disadvantages of these lines of credit depending on the
usage of the borrower. Consumers must have the knowledge and be aware of the consequences
they will face when taking up credit.

Therefore, as we notice credit cards can make life easier and be a great tool, but if they
are not used wisely they can become a huge financial burden. If you do decide to use credit
cards, remember these simple rules, keep track of all your purchases, don't spend outside your
budget, pay off your balance on all of your credit cards at the end of each month and don't loan
your credit or give out your credit card information to anyone but reliable companies.
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10.0 Reference

1) Reading Sources

K.R. Subramanyam & John J. Wild (2009).Financial Statement Analysis. 9 th

Edition. New York : Mc Graw Hill.

Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action.

Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 512

Article of Consumer Credit Regulations in Malaysia: A Country Report by Yap

Kon Lim

2) Internet Sources

I. http://www.maybank2u.com.my
II. http://www.wikipedia.com.my