ABMF 3143

PERSONAL FINANCIAL
PLANNING

Chapter 5
Using Credit
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 LEARNING OBJECTIVES

1. Describe the reasons for using consumer credit and identify its benefits and
problems
2. Develop a plan to establish a strong credit history
3. Distinguish among the different forms of open account credit
4. Apply for, obtain, and manage open forms of credit.
5. Choose the right credit cards and recognize their advantages and
disadvantages
6. Avoid credit problems, protect yourself against credit card fraud, and
understand the personal bankruptcy process
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 Articles on Youth Bankruptcy
• SOME 1,046 out of 83,389 Bankruptcy Cases recorded since 2005 by the
Insolvency Department involved youths Under 25 Years Old
• Total, 487 or 46.5% of them were declared bankrupt for failing to settle
vehicle loans, while 354 (33.8%) were for personal loans

• Other bankruptcy cases mostly involved failure to settle business or

housing loans, while six cases involved failure to repay income tax and
two others failed to repay study loans

• “Some became bankrupt for Becoming GUARANTORS; failing to settle

Credit Card Payments, scholarships or education loans,” he said

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 Bankruptcy

The declaration of bankrupt is mainly because

• Maintained a Lavish Lifestyle
• Poor financial planning
• Improper use of credit cards
• Fail to differentiate between their wants and needs

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 What is Credit Management?
• Debt isn’t a bad thing, in fact, some debt is good
• Credit: receiving cash, goods or services with an obligation to pay later

• Consumer credit can be used in one form or another to purchase just

about every type of goods or services including auto loans EXCEPT for
Home Mortgages

• It is a convenient way to make transaction but when consumer credit is

misused it can lead to real problems

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 Why Use Credit?
• People typically borrow to pay for items or services that cost more than
consumers can afford to pay out of current Income

• By spreading payment over time, expensive items becomes more

affordable, and as a result, consumers can obtain the immediate use of an
asset without having to fully pay for it for many years

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 Reasons for Using Credit
1. To avoid paying cash for large expenses
 Make purchases of big ticket item affordable as payment is spread
over time
 E.g. : Purchase of house, car etc.
2. Financial Emergencies
 When unexpected expenses arises
 E.g. : To sustain during unemployment
3. Convenience
 It is easier to pay with credit card than with cheque
 E.g. : Credit card purchase is a form of borrowing – charge now pay
later

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 Reasons for Using Credit
4. Investment Purposes
 Margin financing
 E.g.: Investor partially finance their purchase of shares

5. To make reservations
 Most hotels, car rental and on-line airline booking requires it to be by
credit card

6. Able to own expensive product sooner

 Homes, cars etc can be owned while payment is made later.

7. To obtain an education (PTPTN)

 High cost of education can force students to take up study loan
 Borrowers are investing in themselves to improve their quality of life
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 The 5Cs of Credit
• Regardless of where you seek funding a prospective lender will Review
Your Creditworthiness
• A complete and thoroughly documented loan request (including a
Business Plan) will help the lender understand you and your business

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 The 5Cs of Credit
• The "Five C's" are the basic components of Credit Analysis. They are
described here to help you understand what the lender looks for:
 Capacity 
 Capital 
 Collateral
 Conditions 
 Character
>>> show your sense of responsibility with respect to loan payment

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 The 5Cs of Credit
CAPACITY:
• Capacity to repay is the most critical of the five factors, it is the primary
source of repayment - CASH
• Lenders will look into your current income level and also borrowing level
>>> Non-obligated Income
• The prospective lender will want to know exactly How You Intend To
Repay The Loan
• The lender will consider the Cash Flow from the business, the timing of
the repayment, and the probability of successful repayment of the
loan
• Payment History on existing credit relationships - personal or
commercial- is considered an indicator of future payment performance
• Potential lenders also will want to know about Other Possible Sources
of repayment
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 The 5Cs of Credit

CAPITAL:
• Refers to your size of financial holding or investment portfolio
• I.e. the more savings you have, the more creditworthy you are
• I.e. the money you personally have invested in the business and is an
indication of how much you have AT RISK should the business fail
• Interested lenders and investors will expect you to have contributed from
your own assets and to have undertaken personal financial risk to
establish the business before asking them to commit any funding

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 The 5Cs of Credit

COLLATERAL:
• Guarantees, are additional forms of security you can provide the lender
to obtain credit
• Giving a lender collateral means that you pledge an asset you own, such
as your home, to the lender with the agreement that it will be the
repayment source in case you can't repay the loan
• I.e. if you were to default a loan, your car will be sold to proceed the
repayment of debt
• A Guarantor, on the other hand, is just someone else signs a guarantee
document promising to repay the loan if you can't
• Some lenders may require a guarantor in addition to collateral as security
for a loan
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 The 5Cs of Credit

CONDITIONS:
• Describe the intended PURPOSE Of The Loan
• Will the money be used for working capital, additional equipment or
inventory?
• The lender will also consider local economic conditions and the overall
climate, both within your industry and in other industries that could
affect your business
• I.e. if you’re laid off because of the downswing in the economy, you might
not able to meet you obligations

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 The 5Cs of Credit
CHARACTER:
• Is the general impression you make on the prospective lender or
investor
• The lender will form a subjective opinion as to whether or not you are
sufficiently trustworthy to repay the loan or generate a return on funds
invested in your company
• Your Educational Background and Experience in business and in your
industry will be considered.
• The quality of your references and the background and experience
levels of your employees will also be reviewed
• I.e. how long have you held your current job?? Are you taking too much
debt at your income level?? Have you established a timely repayment
record of your past debts
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How Much Credit Can you Stand?

• Monthly consumer credit payments (excluding mortgage) should

not exceed 20% of monthly net income.

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 Improper use Of Credit
• Meet basic living expenses
• Make impulse purchases – especially luxury items
• Use one credit make payment on another debt

Except situations for convenience purposes- gasoline, groceries, entertainment

Rule of Thumb
• The product purchased on credit should OUTLIVE the amount of time it
takes to pay off
• i.e. non-durable goods

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 Disadvantages Of Credit
• Use of Credit Reduces Financial Flexibility
 “He who borrows sells his freedom”
 Credit reduces your future purchasing power as you pay off your debt

• The biggest danger in borrowing is Over Spending

 Because credit is readily available especially credit card as you do not
see cash going out
 It is not difficult to spend beyond your means  BANKRUPTCY

• Become Financially Over-stretched

 Consumers with non-mortgage debt repayment amounting to 15% of
monthly take home pay or more are considered in Heavy Debt
 They run the risk of NOT being able to make payment On Time

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To Establish Good Credit Rating
1. Be TRUTHFUL when applying for credit
2. A woman should always use her own name in filing for credit
application ( build our own credit history & credit report )
3. Open a savings/current account
4. Use a charge account – credit card
5. Apply for a small loan – Personal loan or car loan
6. Use credit only when you can AFFORD the repayment schedule
7. Fulfill all the terms of the credit
8. Be consistent in making payment on time ( to maintain a good
credit history )
9. Consult creditors immediately if you cannot meet the payment as
agreed

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 Credit Scoring
• Is where values will be assigned to such factors as Age, Annual Income,
Marital Status, Length Of Employment, whether the applicant owns or
rents a home

• These variables lead to an overall "credit score;" if the score equals or

exceeds a Predetermined Minimum, the applicant will be given credit; if
not, the credit will be refused (though borderline cases may be granted
credit on a limited basis)

• In essence, credit scoring is a highly mechanical process whereby the

Credit Decision itself is based largely on the credit score obtained

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 Types of Credit: Credit Card
• Issued by financial institutions
• Line of credit depends on applicant’s financial status and ability
• Cash advance and balance transfer possible
Fees:
• Government Fee – RM25 per year for Principal Card and Supplementary card. 
• Annual Fee - Maybe waived RM 50 – RM200 per year
• Late Payment Charges - The late payment charge is 1% of the total
outstanding balance as at statement date, subject to minimum RM10 and
maximum of RM100
• Interest Charges - 13- 24% per annum
• Cash Advance - 18% p.a. of the cash advance amount calculated on a daily
basis from the transaction date
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 Credit Card
• Cash Advance Fee - The cash advance fee is 5% of the amount advanced or a
minimum of RM20. This is imposed for each cash advance transaction.
• Minimum repayment - 5% of outstanding balance or RM50.00 whichever is
higher 
Advantages of Credit Card
 Short term interest free loan >>> grace period before interest charge, 14-
20 days
 Simplified record keeping >>> how much you spent, where you spent it
 Easier resolution to unsatisfactory purchases
Disadvantages of Credit Card
 Easy to over spend >>> Easy to lose track, amount charge doesn’t appear
until monthly statement show up
 High interest cost
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 When Using Credit Cards
• Pay at least minimum monthly payments or if possible pay off the entire
amount each month to Avoid Finance Charges
>>> Revolving Credit Agreement
• Pay by Due Date
• Check your statement to ensure the charges are correct
• Your credit card statements, bank statements contain sensitive
information, keep them in a safe place
• Do not sign blank charge slips and draw a line above the total line to
prevent unauthorised additions to the bill
• Destroy all Carbons Copies
• Do not just leave your copy of the charge slips anywhere. They have all the
needed particulars like your card number, expiry date, etc needed to
facilitate a fraud transaction
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 Debit Card
• Provides direct access to your current/savings and works like writing a check
• The amount is deducted directly from your account
• It Does Not provide credit or deferred payment
• Prepaid card is debit card with fixed amount available

Advantages of using a Debit Card:

1. Convenient
• It allows you to assess to cash in a simple and convenient way especially for
people who work same hours with the bank or far away from bank.

• Since the payment is taken directly out of your bank account, where the
money already exists, it can be done instantly. This is much faster than having
to wait for a credit transaction to go through, or having to worry about having
enough cash to cover your expenses 24
 Debit Card
2. Protection
• It provides protection against your cash is lost or stolen. A debit card can
be cancelled and replace with a new ordered.  If someone did get the
card or card number before you realize it is gone, it has Preset Limits.  An
unauthorized transaction can always be disputed and refunded

3. Budget
• When a debit card is used appropriately, it can help you budget much
more than a credit card.  Most debit cards stop allowing transactions
once your balance is at zero, which also can save on fees such as
overdrafts.  Every financial institution has different policies regarding
debit card approvals.  At Denmark State Bank, the card would be declined
when there is not enough of a balance in the account to cover the
purchase 25
 Protecting Against Debit/Credit
Card Fraud
• Sign new cards when they arrive
• Treat cards like money - keep them secure
• Shred anything with your account number on it
• Don’t give your number over the phone unless you initiate the call, and don’t
put it on postcards
• Get card & receipt after every transaction: compare receipts to bills when
they arrive, checking for errors
• Check credit report
• Use secure internet sites
• Do not put credit card info on cheques or personal info on charge slip
• Draw line through blank spaces or slip
• Destroy old cards and shred old statements and slips
• Report lost or stolen cards immediately 26
 Revolving Credit Lines
• Open account credit offered by bank and other financial institutions
• A line of credit that you can use and pay back at whatever pace you like as
long as you pay a minimum balance each month, paying interest on the
unpaid balance
• The lending institution grants you a maximum credit limit, which you can
use to make purchases at any time
• Many small business owners and corporations use revolving credit to
finance capital expansion or as a safeguard in the event of cash flow
problems
• Usually offer higher credit line and lower interest rates than credit cards
• Revolving lines of credit normally don’t involve the use of credit cards.
Rather, they’re accessed by writing cheques
• on regular checking accounts or specially designated credit line accounts.

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What Happens When You Cannot Pay?

• Sued by the company

• Bankruptcy proceeding – Last Resort
• You may not be allowed to travel oversea
• Not allowed to apply for any loan for 6 years
• Consult AKPK

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Steps To Get out Of Excessive Debt
• Contact your creditors – renegotiate loan terms (restructure your loan)
• Determine the account balance and payment required
• Ask your lender to give monthly payment in dollars
• Request for lower payment amount but lengthen the maturity period
• Focus budget on debt reduction, Set aside money for loan payment
• Pay off loan with the highest interest charges, especially credit card loan
• Sell off available assets/ investments – e.g. shares
• Refinance your assets –i.e. house or car
• DO NOT take on new credit
• Contact AKPK

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 Avoid Credit Problems
• Use discipline when purchasing
• Reduce the no. of credit card you carry
• Be selective in accepting preapproved credit offers
• Pay more than the minimum
• Pay off cards with the highest finance charges first
• Transferring balance to card with low introductory rate and paying off
quickly 

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 Credit Danger Signs
• Regularly use credit cards to buy on impulse
• You postdate cheque to keep them from bouncing
• Regularly exceed the borrowing limit on your credit cards
• Never add up all your bills, to avoid facing grim realities
• You now take 60 or 90 days to pay bills you once paid in 30
• You have to borrow just to meet normal living expenses
• You often use one form of credit – such as a cash advance from a credit
card to make payments on other debts

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 Credit Danger Signs
• You can barely make the minimum required payments on bills
• You are using more than 20% of your take home pay income to pay
credit card bills and personal loans (excluding mortgage payments)
• You have no savings
• You are so far behind on credit payments that collection agencies are
after you

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 Pitfalls and Dangers
• Signing Guarantees
• Spending beyond means
• Lending your name in transactions
• Missing Identity card/purse
• Identity theft- uses your name, addresses, bank or credit card without
your knowledge to commit fraud or crimes

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 Precautions To Take
a) Report lost identify documents immediately
• Many important documents are lost daily through carelessness, fraud and
theft. Lost of credit cards, passport, identity card, birth certificate, driving
license or any other identification papers maybe used in a fraud
• Lodge a report with the relevant authorities immediately for your own
protection and safeguard
• Keep a list of contact numbers and photocopies of important
documents. They are often very helpful when you lodge reports to the
authorities
• Some credit grantors like banks and credit card issuers have 24 hours toll
free numbers specifically for such purpose

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 Precautions To Take
b) When using your ATM & PINS
• Choose a PIN that is unique, try not to use birthday, identity card number, or other
obvious numbers
• Do not write your PIN on the card
• Do not let anyone know your PIN. If you feel or know that your PIN has been
compromised, change it
c) When you discover your identity is fraudulently used
• You must report to the Police
• You may then also check with CTOS to see if there are any records on the database.
If you suspect that any of the record/s on the database is a result of fraud, do let
authorities know so that we can carry out due investigations and tell you what to do
to get the record removed from the database
• Option If You are in Trouble - AKPK

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Credit Application Process

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 Credit Bureau
A credit bureau is an organisation that collects and stores credit information
about individual borrowers
• Is a type of reporting agency that gathers and sells information about
individual borrowers. If, as is often the case, the lender doesn’t know you
personally, it must rely on a cost-effective way of verifying your
employment and credit history.
• It would be far too expensive and time-consuming for individual creditors
to confirm your credit application on their own, so they turn to credit
bureaus that maintain fairly detailed credit files about you.
• Information in your file comes from one of three sources: creditors who
subscribe to the bureau, other creditors who supply information at your
request, and publicly recorded court documents (such as tax liens or
bankruptcy records).
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 Central Credit Reference
Information System (CCRIS)
• The Credit Bureau in Malaysia is established under the Central Bank of
Malaysia Act 1958.
• The Credit Bureau essentially collects Credit Information on borrowers
from lending institutions and furnishes the credit information collected
back to the institutions in the form of Credit Report via an on-line system
known as Central Credit Reference Information System (CCRIS)
>>> CCRIS is a computer database which contains all their credit
information all creditors / borrowers
All financial institutions in Malaysia are required to submit a monthly credit
information of all their creditors / borrowers to Credit Bureau in Bank
Negara Malaysia

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 Central Credit Reference
Information System (CCRIS)
• All the data will be process by Bank Negara Malaysia for a credit report
which can be access by any financial institution when ever they require
• CCRIS report will show all your total credits, interest charges and other
outstanding of all loans that you have with any banks in Malaysia
• From housing loan, personal loan, credit card, hire purchase and
overdraft. Everything will appear in CCRIS. It will give an overview for the
bank officer for Financial Capability of a person who is applying a new
bank facility

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 Central Credit Reference
Information System (CCRIS)
• CCRIS will also give the information on any summons or bankruptcy
that being filed
• I.e. The financial institutions Extend Credit Facilities to borrowers either
for business or personal purposes. To facilitate these institutions to make
assessments and decisions on credit applications, the financial
institutions would require up-to-date and accurate information on
their prospective borrowers. Therefore, the information in the credit
report could assist the financial institutions to make informed decisions
on credit applications
• At present, the database system contains credit information on about 9
million borrowers in Malaysia

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 Role of CCRIS
The existence of a Credit Bureau
• makes it easier for financial institutions to make informed and
responsible lending decisions in a more timely manner
• Checking with the credit bureau would also help the financial
institutions to mitigate any possibility of serious problems
such as fraud cases

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Information Held by the Credit Bureau

• The Credit Bureau of Bank Negara Malaysia collects only credit

information on individuals, businesses (sole proprietors and
partnerships), companies, and even Government entities borrowers
• Information collected by the Credit Bureau is sourced by the participating
financial institutions in Malaysia
• Reference information on the particulars of borrowers is sourced from the
National Registration Department and the Companies Commission of
Malaysia for purposes of verification against the particulars provided by
the financial institutions 

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 Information Held by the Credit Bureau

Subject to the approval by Bank Negara Malaysia, credit reporting agencies

(CRA) registered under the Credit Reporting Agencies Act 2010, can access the
credit information of individual borrowers in CCRIS, with prior consent
from the borrowers. To date, three CRAs have obtained such approval:
• Credit Bureau Malaysia Sdn Bhd;
• RAM Credit Information Sdn Bhd; and
• CTOS Data Systems Sdn Bhd.

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Information Held by the Credit Bureau

• The data is updated by the data providers on a regular basis

• For each and every borrower, the financial institutions are required to
report to the Credit Bureau the following types of data:
 Personal particulars of borrower such as name, identification number,
address, etc
 Credit facility account details such as type of credit facilities, credit
limit, outstanding balance, conduct of account and legal action
status

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 Credit Tip Off Service (CTOS)
• Credit Reporting Agencies that collects information from various
sources found in the PUBLIC DOMAIN to aid decision making processes
• Report service offered by Private Company, owned and managed by a
Malaysian, in business for over 20 years
• Sells information to potential lender
• DOES NOT attempt to show the ‘Current Status’ of legal cases, searches ~
it is Historical Record only
• DOES NOT rank, rate or give opinions on credit application as to the
credit worthiness, integrity, character of the subject inquired
• All lending policies, loan approvals and decision making are determined
by the lenders or credit grantors themselves, not CTOS

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 Credit Tip Off Service (CTOS)
• It provides information that are historical that credit grantors want in
their bid to know more about their customers better, past track record
etc.
• I.e. company provides information to subscribers who may require report
for various purposes, including opening of account, extension of credit
or loans, hire purchase/ leasing/ purchase of properties or
equipment, job employment 
• Allow individuals with personal credit reports to manage their Business
Credit Risk thru Credit Checks, customer monitoring and trade
reference
• CTOS data system is a lead information system widely used by the
majority of the Financial Institutions, Commercial Companies &
Businesses, Legal Firms and Government
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 Credit Tip Off Service (CTOS)
• Credit grantors will only assume risks that they find it comfortable and
acceptable within the limits set by their organization
• When you apply for loans, credit cards, hire purchase or leasing facilities,
etc in Malaysia, the chances are the credit grantor will make an enquiry in
the CTOS system for information leads
• The CTOS system is NOT a Blacklisting System

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 The Sources of CTOS Information
• Legal notices in Newspapers
• Searches at the Companies Commission of Malaysia (CCM)
• Government Gazettes & Publications
• Searches at the Malaysia Department of Insolvency (MDI)
• National Registration Department (NRD) - Services for national identity
documents
• Searches at the Registry of Societies Malaysia (ROS) - club, partnership or
association that consists of seven (7) or more persons
• Contact information provided by creditors / litigators / trade referees
• Voluntarily Information provided by subjects themselves
• Only CTOS subscribers can access the CTOS Information Database

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