If you’d like to see more bank comparisons and explainer-style breakdowns of consumer services in Brunei, there’s a drop-down menu on the sidebar – select “Banks & $ervices” and it’ll take you to the full list of notes. You’ll find material on savings accounts, fixed deposits, and all that other stuff.
I’ve been getting a lot of questions about credit cards lately, so let’s dive straight into it.
What are credit cards?
In its simplest form, credit cards are a financial tool that provide you with the ability to delay payment. Essentially, instead of paying ca$h for something as you would traditionally, you are allowed to charge a purchase onto your credit card and the expense is turned into a bill that you need to pay at a later date – usually within 3-4 weeks. If you pay off and settle your credit card bill in full within that time-frame, you don’t need to pay any additional fees (i.e. interest). So technically, the bank grants you a “delay option” up to one month for absolutely FREE!
However, if you don’t settle the full bill, and only pay the minimum payment or a percentage of the total, you would incur an interest charge on the “outstanding balance”, which is whatever you have leftover that’s still unpaid after the due date. If you don’t pay anything at all and completely ignore your bill, you’d get smacked with both interest and a penalty charge.
A penalty charge is usually a flat rate that is slapped on every time you completely ignore your bill; this is also known as a “late fee” and for HSBC – the bank my credit card service is with – it’s $40. Interest, on the other hand, is charged on a percentage (%) basis on whatever outstanding balance you have remaining. Hence, the larger your outstanding balance, the larger your interest payment and vice versa.
But we’ll get into interest later, first let’s talk about why you would you want to delay payment for a month. What’s the point of this service, and how is it useful for you as a consumer?
The main benefit of a delayed payment option is for when you don’t have enough money to pay for an expense you need/want to make right now… But in a couple of weeks (usually around the same time or before your credit card bill is due) you expect your next salary to get dropped in and you can use those new spending funds to clear your bill. So a credit card is a fantastic, magical device that offers you the (free!) ability to push the responsibility of payment to your future “next month” self; so you’re able to dig into next month‘s budget to pay for this month’s over-expenditure.
Do take note that this service is only FREE (and fantastic) as long as you clear your bill in full (i.e. pay it off completely) within that 3-4 week window before your credit card bill payment is due.
An important point of clarification is in order at this juncture: When I say you’re able to use next month’s “spending funds” to pay for this month’s credit card bill, I’m referring to the money/budget you would’ve already allocated for spending for that particular future month – not your savings!
If you’re going to use your credit cards responsibly, Financially Savvy Mamat style, you should always avoid depleting your savings in order to pay off a bill, unless the expense you charge onto your credit card qualifies as an emergency withdrawal from your emergency fund. So, for example, I’d charged the $560 I spent on my new air-con onto my credit card a couple of months ago. In order to clear that bill before the due date, I had to pull funds out of my short-term savings tray (i.e. my Pocket), and in doing so, I did deplete my total overall savings a little bit. But since that purchase was a necessary, emergency expenditure (and not a want), digging into my savings was justified – and I immediately started to patch that hole up the month after. However, on a regular, day-to-day (or month-to-month) basis, credit card usage should not require frequent digging into your savings.
If you’re throwing all your monthly savings at paying off your monthly credit card bill, you’re clearly doing it wrong! If you save $500 but rack up $500 in credit card bills, you’ve effectively saved zero dollars. Good job, buddy.
But like I said earlier, once in a while an emergency, unplanned expense may crop up (which is completely normal), and once in a while you’ll have to charge this expense to your credit card. And once in a while this expense may be big enough that you’ll need to dig into your savings to clear it off fully (to avoid interest payments). Notice that I’ve said once in a while, not always.
Moderation is key, guys. For your diet, your make-up, and your finances.
In summary, a credit card is best viewed as a tool which allows us to defer payment for 3-4 weeks at no additional cost. We need to realize that whatever expenses we charge onto our credit cards becomes a bill which – as with all other bills (e.g. phone bill, water bill, internet bill) – we need to pay off as quickly as possible.
Of course, this is the ideal, Utopian, financially fabulous situation. But we all know that reality tends to play itself out quite differently.
Unfortunately, I think most people see their credit cards as more “money” available for them to spend, especially because banks in Brunei easily offer you a credit limit of two times your monthly salary. Imagine not being constrained by the limits of your tiny paycheck anymore!
If you earn $2500 per month, the bank your salary is assigned to will happily offer you a plastic card worth twice that amount – that’s $5000!
This inadvertently means that a large segment of the population view credit cards as convenient extensions to their spending ability. Your monthly budget (or spending fund) is no longer limited to what’s left in your General account anymore; this wondrous, newfangled “credit card” technology will make your spending ability grow twice it’s size!
And what happens is people succumb to the irresistible urge of inflating their lifestyles and spend as if they have a $7500 salary (instead of $2500), and because the kindhearted banks are generous enough to allow you to pay a very small minimum payment every month, and charge a “very small” interest on the outstanding balance, people get lulled into believing that this convenient extension to their spending ability doesn’t cost them very much at all.
But banks aren’t exactly goodwill organizations are they? The Clever Banker Businessmen are not exactly out to do you a favour if they don’t get anything in return… Right?
We’ve finally reached the juicy bit – let’s take a look at a comparison of credit cards across banks in Brunei; what the interest rates offered are, the minimum payments, late fees, and all that jazz. I know all y’all have just been too lazy to do yer own research – you’re welcome, does this mean we’re besties now?
As you can see, just like with the savings accounts and fixed deposits we’d looked at earlier, the credit card fees on offer in Brunei are pretty uniform across all banks. To my knowledge, you can only get a credit card with BIBD, Standard Chartered, and Baiduri. TAIB doesn’t offer them, and I don’t know much about the Malaysian banks RHB or Maybank. Since HSBC began winding down a couple of months ago, they no longer offer credit cards to new customers but existing cardholders like me can still enjoy the service (for now).
Before we take a closer look at the table, let’s quickly distinguish between two terms: “statement date“ and “due date“. The statement date is basically a date of the month that the banks pick to check your credit card bill balance, and they use that balance to calculate your minimum payment for the end of the month. The expenses you’ve incurred up to your statement date will show up on your bank statement, and the date chosen is normally the 15th. That’s why if you charge something to your credit card on the 18th, it might not show up on your bank statement – but you’ll see it in next month’s statement instead. The due date, on the other hand, is when your minimum payment for that statement is due; this is normally either the 30th of the month, or the 4th of the next month. So every due date, you’ve got to pay either the minimum payment or the full amount as registered on your statement date. And if you’ve paid the full amount, no further interest payment or late fee will be applicable. But if you’ve only paid the minimum amount by the due date, some interest fee will be smacked on. Capeesh?
It’s safe to say that in Brunei, the minimum monthly payment due is 8% of whatever you have remaining on your credit card bill on the statement date or a minimum of approximately $40; whichever is higher. This means that if you started off with a new credit card and racked up $1000 worth of expenses by your statement date, your minimum payment at the end of the month (i.e. due date) would be 8% of that total, which is $80. However, if you were a goo’boy and only had a balance of $100 on the statement date, and 8% is only $8, your minimum payment would have to be $40 – since that’s the minimum dollar value applicable.
Is this confusing? Well fasten your seatbelts cuz we’re not done.
What about interest fee? Across the board, banks in Brunei charge 1.5% interest per month on whatever outstanding balance after the due date. Like I mentioned earlier, this interest charge is only applicable if you don’t fully clear off your bill. If we take the examples above, if your balance due at the end of the month is $1000, your minimum payment would be $80, which (once you’ve paid that) would leave you with a remainder of $920. The interest fee applied to that remainder would be 1.5% (of $920) which is $13.80. And this interest fee is added to your outstanding balance and rolled over to next month’s bill, which – if you don’t charge any new expenses onto your credit card – would be $920 + $13.80 = $933.80. And this process repeats itself every month.
All the banks listed above charge 1.5% per month in “interest”.
BIBD practices Islamic banking and shudders at the thought of using the term “interest” (because that’s not Syariah compliant, the horror) but they still effectively charge 1.5% on rollover balances, they just call it something else and calculate it in a roundabout manner. I’ll write a separate post about it eventually because it’s actually very interesting how they try to maneuver around the word interest. Instead of stating that they charge 1.5% on your remaining unpaid balance, they instead charge a flat “admin fee” on your credit limit and then give you a “discretionary rebate (‘Ibra) based on criteria set by the bank on the payment pattern”. Wokay.
Please understand that I’m not anti-Islamic banking nor am I anti-BIBD; it’s just important to be aware and realize that the net or overall effect of this Islamic banking calculation on your bill is the same as the banks who do openly charge interest. I’m not saying that there’s no point to Islamic banking. I’m saying the difference between regular banking and Islamic banking is often simply the legal terms, the language, and the “calculation methodology”; but the ultimate impact on your personal finances is the same. Just because Islamic banking doesn’t purport to charge interest doesn’t mean there are no fees to pay; it doesn’t mean it’s cheaper!
One thing that does seem to stick out though, is that BIBD does not charge a late fee if you shrug your shoulders and refuse to cough up a cent when your bill is due. The only thing that happens is you get the 1.5% “charge” applied to your entire balance.
Okay. Let’s run through the main points again real quickly.
Credit cards are great if you’re looking to defer payment, but if you don’t clear your bill off completely before the end of every month (which you should if you wanna sit at the cool table), you’re setting yourself up for extra charges in the form of interest. Banks tempt you into paying interest by offering you a really low minimum payment option; we have to realize that minimum payment means maximum interest. The mathematics is simple: the less you pay, the more outstanding balance you have remaining, and the 1.5% charge applies to this larger amount, ensuring that you’re charged the maximum interest possible. You’re not given a credit card because the bank is being nice; you’re given a credit card so you get tempted into this unhealthy cycle of minimum payments, and the banks make their money off of your maximum interest fees.
In fact, until the Ministry of Finance issued a directive in a bid to target consumer over-indebtedness six years ago, the minimum payment used to only be 3% and in 2006, interest rates were 2.5%! By lowering the minimum payment and increasing the interest rate, banks are able to collect even more revenue through your interest fees. Even if interest were held constant, paying off credit card debt sikit-sikit (as close to the minimum as possible) means you lose more money, over a longer period of time to the benefit of the banks. This doesn’t make the banks evil; this is just business – and where there’s demand for credit facilities (i.e. loans, credit cards) and a demand for minimizing monthly payments, banks are there to supply just the right financial services at a price.
So even if you’re unable to completely clear off your credit card bill before the end of the 4 week “free trial” window – and have no choice but to incur interest by allowing an outstanding balance to rollover – paying off your credit card should always be a big, big priority, and you should throw as much “spare money” towards that goal as possible to prevent interest fees from sucking your wallet dry. If you have an existing credit card balance and you’ve coasted through the years simply paying the minimum every month, you may have already lost hundreds – perhaps even thousands – of dollars to interest payments in your blissful ignorance – what a waste of money!! Wouldn’t you rather use those funds to spend on things that actually make you happy? I’ve never heard anyone say they love spending on interest payments, so why do so many people insist on losing so much of their money to it?!
Remember Myn’s three golden rules to building wealth and getting out of broke: grow assets, kill debt, adjust your spending as necessary. Personal finance is truly personal so there’s no one-size-fits-all recipe; how you balance these three goals depends on your own unique situation. If your credit card debt is spiraling out of control, it might be better to slow down your savings’ growth and reroute that money towards killing the debt monster first. Because what’s the point of filling a bucket if you don’t patch up the hole in the bottom?
Credit cards are essentially mini-loans, but when I say mini, I mean the credit limit (i.e. maximum borrowed amount) is smaller compared to personal financing and the credit “revolves”, meaning you can just keep “borrowing” the money and paying it off and “borrowing” again, unlike a personal loan in which the monthly payments and time period are predetermined, and you would have to reapply for a new one once you’ve paid it off.
But did you know that these mini-loans have the HIGHEST GAD-DANG INTEREST RATE YOU’VE EVER SEEN IN YO’ LIFE!!!1!!!
Remember, the 1.5% interest rate is per month and if you rattle your brains a little bit, you’ll realize that every other interest rate quoted by the bank is on a per annum (yearly) basis.
Let’s have a pop quiz.
How much is the interest on your car loan?
4.5% right? Or is it 4.75%?
What’s the market rate for personal financing in Brunei?
6% – 7.5% right? Something like that.
What about housing loans?
It’s around about 5.5% – 6% I think.
Per twelve months = per year.
Here’s a surprise question: How much interest does a general savings account earn in Brunei?
0.15% per year – don’t you dare get this wrong, you better be reading my notes properly.
How much interest does a fixed deposit earn over one year?
0.75% for a minimum deposit of $1000 over one year.
Now that you’re warmed up, what’s the interest rate on your credit card?
Erm. 1.5% per year.
Oh right, 1.5% per month.
Well, industry standard is to calculate interest over a year. So you have to multiply that by…
Yes, very good. So what’s 1.5% x 12 months?
18% PER YEAR ?!?!?!?!?!
If you need even more convincing, here’s a conspiracy theory style compilation of what the banks have to say about their interest rates. (Spoiler: none of them quote a per annum rate):
And here’s the final nail in the coffin. If you already have your own credit card, look closely at your last credit card statement. If you’re with HSBC like I am, it’s on the bottom-right corner.
NIGHT NIGHT, SLEEP TIGHT – DON’T LET THE CREDIT CARD NIGHTMARES BITE.