If you have just started working and earning a fixed income from an employer, it is certain that at one point you have been invited by a representative from a financial institution to apply for a credit card. However, you may observe that a lot of advertisements on social media are about these pieces of plastic. It seems that banks are aggressive to get more customers.
In a report in 2017, the World Bank estimated about two percent of Filipinos own credit cards which is much lower than the 22 percent average among its East Asia and Pacific peers. In 2019, just before the pandemic changed everything, 53 percent of Filipinos paid their utility bills in cash.
The COVID-19 pandemic served as an opportunity for more cashless transactions. These, however, did not necessarily mean credit cards were behind it. Electronic wallets like GCash, Maya, and ShopeePay which had less stringent account application process became more popular. The main difference between the two is that electronic wallets use debit form transactions wherein there are already funds in the account. Meanwhile, credit cards use credit form transactions as the name suggests. A fixed credit limit which financial institutions compute based on your average monthly income serves as the threshold of your allowable expenses. Then, you will be billed on a monthly basis on a specified billing cycle.
Now, what are the advantages of using a credit card? There are several reasons why the more financially literate people have been using them. These include a range of flexiblity, access and perks.
Avoid losses in cash transactions
Merchants or stores where you purchase items are actually charged a specified amount for each transaction done using a credit or debit card (usually two percent). When you visit a gadget store, for example, you will observe they have at least two different rates for those who pay in cash and those who pay in card. This scheme is actually to the advantage of both parties because the merchant avoids fees from the banks with these transactions while you as the buyer also gets an instant “discount” for the cash transaction. This only happens when the store offers two prices; but if the store does not offer two prices, you are losing money when you pay in cash.
The other way merchants avoid paying fees from the banks is to increase their markup when they sell their products. This is to defray any anticipated additional charges in these types of transactions from their side. To put it on an easier concept, whether you pay in cash or card, you pay the same amount. The loss here is because using a credit card for instance has some perks or rewards (depending on the rewards program of your card issuer) while paying in cash gets you nothing for paying extra. In part, you can see that credit cards have potentially caused things to be more expensive and the only way to outsmart this situation is to use the cards.
Get flexibility in finances
In my circle, there is a mixed opinion about installments. “Utang” is something not everyone is proud to talk about. But come to think of the bigger picture, development in our country is facilitated through loans from multinational financial institutions. These incur debt but provide the country some flexibility to use its own resources for other priorities. How will this concept be more applicable to you?
Let’s say you have PHP200,000 in your bank account and you always needed to buy a high-end, high spec computer. You decided to purchase a MacBook Pro 14″ which cost PHP120,000. Basically, you can buy it in cash and it will leave you PHP80,000. Still a good deal right? But it makes your financial health vulnerable. The following month, a typhoon damaged your house and you needed PHP100,000 for immediate house repairs. Assuming you will get all of the money from your bank account, you still lack PHP20,000. Even if you have PHP20,000 monthly income, it will seem difficult to manage.
This is where installment comes in. With the same reference figures, let us say you bought the MacBook for PHP120,000 in a 24-month installment at zero percent interest. That will mean PHP5,000 per month charge. This means you only spend PHP5,000 on the first month leaving PHP195,000 in your bank account and you also have enough money left for the damage in your house the following month. This leaves you PHP95,000 in your bank account. With the monthly income you have at PHP20,000, the Macbook is still within budget and will not leave you in debt after the second month.
Credit card transaction also has several perks such as cashbacks that saves you extra depending on your bank issuer’s promotions. More discussion on this below.
Earn cashbacks and other perks
Each credit card has its own rewards system which is seen to entice customers. From extravagant new cardholder cashbacks to free Airpods, banks are obsessed in getting new customers. This is one reason why banks charge those fees to merchants (the stores where we buy things) because ultimately, they have to find ways to fund these promotions.
Now it may be counterintuitive given that these financial institutions are making a lot of money and enslaving merchants and even ourselves. But that is just the way it is. Our choices have been decided. Thus, this is also the main reason to get a credit card to ensure we make the most of our hard-earned money.
For a newbie, there are a lot of perks awaiting that usually requires a minimum spend for a specific period of time. Thus, when considering to apply for a credit card, it is best to apply within the timeframe of a promotion giving huge cashback rewards upon attaining a minimum spend and at the same time, you are planning to buy an expensive essential item like an appliance or a gadget.
To illustrate, you need to buy an inverter-type air conditioning unit worth PHP20,000. You also want to get a credit card to take advantage of its rewards program and sign-in perks. Let us say Bank X is offering a PHP5,000 cashback to new cardholders for a minimum spend of PHP20,000 within the month of card approval and receipt. Thus, this situation with Bank X is an opportunity for you to get the most of your money. Not only do you get your much needed item, you also get PHP5,000 cashback. It potentially gave you a 25 percent “discount” on your AC or an instant PHP5,000, whatever your mentality dictates.
While several reasons to have a credit card have been laid out, it still boils down to your own personal preference. Whether you pay in cash or via a card, there is always an advantage and a disadvantage. The most important factor is to ensure that you have a healthy financial standing indicated by having a steady budget, remaining debt-free, and keeping a ready emergency fund.
There are two types of credit cardholders in general, the transactor and the debtor. The transactor maintains good fiscal management by making sure that all monthly dues are paid in full which in turn does not get burdened by interests if any. The debtor, on the other hand, is something we should avoid becoming as this means that the credit card is taking more advantage of us than the other way around. These cardholders are burdened by unhealthy financial decisions which end up burdening them with interests for not paying the monthly dues in full. The only middle ground of debt with a credit card is having zero interest.
So, use your credit card wisely. It is not as disadvantageous as you think. It is a matter of learning life skills in financial management either theoretically or by experience. When you master the art of credit cards, you will be steps ahead from those who pay in cash.