If you’re burdened by outstanding credit card balances, you’re not alone. However, there’s good news: a personal loan for credit card debt could be your pathway to financial freedom.
In this article, we explore how taking out a personal loan can help you regain financial control and escape the burden of credit card debt in Malaysia.
Personal Loans vs Credit Cards: How are They Different?
When managing your personal finances, understanding the differences between personal loans and credit cards is crucial for making informed decisions.
Here are a few essential characteristics to know about personal loans and credit cards in Malaysia:
|Characteristic||Personal Loans||Credit Cards|
|Type of Debt||Instalment debt with fixed payments||Revolving debt with flexible spending|
|Interest Rates||Generally lower, fixed rates||Variable rates, may be high if not paid in full monthly|
|Payoff Date||Clear endpoint with set loan term||No specific timeline, ongoing balance|
|Monthly Payment Structure||Fixed, predictable payments||Minimum payment required, flexibility to pay more or less|
|Pros||Fixed payments for budgeting||Flexible spending and payment options|
|Lower interest rates in most cases||Convenient for daily expenses|
|Clear loan term and endpoint||Potential for rewards and cashback|
|Cons||Lack of flexibility for additional borrowing||High-interest rates if not paid in full|
|May require collateral or a good credit score||Easy to accumulate debt if not managed wisely|
|Penalties for early repayment||Minimum payments can lead to debt cycle|
|Longer approval process||Potential for late fees and penalties|
Now that we’ve outlined the essential characteristics of both personal loans and credit cards in Malaysia, let’s delve deeper into each of these aspects to help you make the right financial choices.
1. Type of Debt
The type of debt varies significantly between the two options. Personal loans are considered instalment debts, meaning that they require fixed payments over a predetermined period.
Borrowers receive a lump sum at the start of the loan term, which is then paid back in instalments.
On the other hand, credit cards are categorised as revolving debts. Borrowers can borrow up to a maximum limit before repaying the debt and borrowing again.
This revolving nature allows for more flexibility but can also lead to a cycle of accumulating debt if not managed carefully.
2. Interest Rates
Another vital consideration is the interest rates associated with each type of debt. Personal loans generally have fixed interest rates that are established at the time the loan is approved.
These rates are often lower than credit card interest rates, making personal loans a more cost-effective option for some borrowers.
In contrast, credit card interest is only applied if you do not pay the full amount owed each month.
In such cases, users will incur interest charges based on a tiered percentage system established by Bank Negara Malaysia (BNM) in 2011.
These interest rate charges are categorised into three tiers: 15%, 17%, and 18% per annum, based on your outstanding balance and payment history over the past year.
Paying your bills consistently for 12 months puts you in Tier 1 with a 15% interest rate.
Missing payments or paying for less than nine months, however, places you in Tier 3 with an 18% interest rate.
Plus, new credit card users start in Tier 3 and move based on their billing history.
Keep in mind that these percentages represent the maximum rates banks can charge their customers, but fees may vary among financial institutions.
3. Payoff Date
Personal loans have a set payoff date, offering borrowers a clear endpoint to their debt. Some loans even allow for early settlement without penalties.
In contrast, credit card debt doesn’t have a specific timeline for repayment.
This is because you can continually add to the balance, which means carrying the debt indefinitely is possible if only minimum payments are made.
4. Monthly Payment
Lastly, the structure of monthly payments offers yet another layer of distinction.
Personal loans have fixed monthly payments, which can benefit those who prefer predictability and are budgeting long-term.
However, this rigidity can be a downside if a borrower faces financial difficulties and can’t make the fixed payments.
Credit cards offer more flexibility in this regard. You’re required to make a minimum payment each month to avoid penalties and late fees, although this might result in accumulating interest.
Moreover, you can choose to pay off your credit card balance quickly if you are able to.
How to Pick A Personal Loan for Credit Card Debt in Malaysia
Choosing a personal loan for credit card debt in Malaysia is a vital financial decision that requires thorough consideration of several factors, including:
1. Personal Loan Amount
First and foremost, the loan amount must be sufficient to cover your total credit card debt.
Therefore, it’s essential to review different banks and lenders who offer varying minimum and maximum loan amounts, as this will depend on your creditworthiness.
Banks also take into account several other key factors when evaluating loan applications, such as:
- Your Credit Score
With a minimum requirement often set at 640, a higher score is typically more favourable.
- Your Eligible Loan Amount
The amount you request can impact the interest rate you receive; larger loan sizes may qualify for better rates.
- Your Company Background
If two individuals earn identical salaries but are employed in distinct settings— one in a private company and the other in a government-affiliated corporation—the bank’s risk assessment may vary.
- Your Company’s System
Banks may view clients more favourably if their companies have a BIRO system in place to deduct personal loan instalments, as this offers added security.
2. Interest Rates
Interest rates are another crucial aspect of personal loans for credit card debt to examine.
Banks and lenders typically offer varying interest rates based on your credit score.
A better credit score can significantly reduce the interest rate you’re offered, making your monthly repayments more manageable.
3. Loan Terms
Similarly, the terms and tenure of the loan you are applying for highly depend on your credit score, eligible loan amount, company’s background and system.
For instance, a better credit score will result in more favourable loan terms.
Moreover, your priorities will also influence the loan term you choose; if you aim to pay off the loan as quickly as possible, a shorter repayment term would be beneficial.
On the other hand, if you need to maintain lower monthly payments due to budget constraints, a loan with a longer repayment term might be more appropriate.
4. Fees & Charges
Lastly, don’t overlook the charges that may come with the loan.
Banks and other lending institutions often have various fees, such as insurance, stamping fees, late payment fees, and early settlement fees, which can vary based on your credit score.
If you intend to pay off the loan early, be vigilant about any lock-in periods that might incur extra costs.
In this context, it’s vital to look for loans with the lowest possible early settlement fees or, ideally, no such fees at all.
What are Common Mistakes to Make When Paying Off Credit Card Debt in Malaysia?
When paying off credit card debt in Malaysia, people often make common mistakes that can prolong their financial struggles and impact their credit scores, such as:
1. Making Minimum Payments Only
One frequent error when paying off credit card debt is making only the minimum payments on credit card balances. This strategy has several pitfalls that can prolong your financial difficulties.
Firstly, making only the minimum payment extends the time it will take to pay off the debt completely.
Moreover, if your credit card usage exceeds 50% to 70% of your available credit limit, this could negatively affect your credit score.
Secondly, while you’re making those minimum payments, your credit card balance continues to accumulate interest and other charges, inflating the amount you owe over time.
Lastly, when you pay only the minimum amount, a significant portion is applied toward interest and fees rather than reducing the principal balance.
This essentially means you’re not making substantial headway in eliminating the original amount spent, leaving you in a prolonged state of indebtedness.
2. Continued Usage of Credit
Another pitfall is the continued usage of credit cards while attempting to pay off existing debt.
Adding more to your credit card balance will require greater effort to clear the debt, potentially demotivating the borrower.
Therefore, it’s crucial to limit credit card usage to purchases that can be paid off immediately and to avoid excessive reliance on credit as a financial resource.
3. Paying Off Debt with More Credit
Some individuals compound their financial issues by attempting to settle existing credit card debt with more credit, such as taking out a new credit card or loan.
This strategy merely delays the inevitable, making no substantial progress toward reducing overall debt and potentially leading to a destructive cycle of borrowing.
4. No Repayment Strategy in Place
When juggling multiple debts, many try to pay a little bit toward each one, which is generally ineffective.
Instead, it’s advisable to make minimum payments on all accounts while focusing on either:
- The debt with the highest interest rate (the debt avalanche method) or
- The smallest debt (the debt snowball method) first.
5. Closing Your Accounts Immediately
Closing a credit card account immediately after paying it off is another common mistake.
While it might seem logical to prevent future debt, closing an account can negatively impact your credit score by reducing your credit and increasing your credit utilisation ratio.
As a result, you should close your credit card accounts with high annual fees while keeping other credit cards unused.
6. Not Knowing Your Payment Due Date
Many individuals are unaware that they must make payments before the due date. They often wait until they receive their payslips to make only the minimum payment.
For instance, if the due date is the 20th, any payment made after that is considered late.
What’s more, it’s essential to note that you must pay at least 5% of the total for all outstanding credit card balances.
If you have an RM10,000 outstanding balance, the minimum payment required is RM500.
Falling short of this minimum amount can have two significant consequences:
- Late payment charges will be incurred.
- It will negatively impact your annual interest rate.
- Your CCRIS and CTOS records will mark this month as a late payment, displaying a ‘1’.
How Bluebricks Can Help with Personal Loans for Credit Card Debt in Malaysia
- Personal loan rejected services
- SME loan rejected services
- Mortgage loan rejected services (for buying a new home, refinancing and cashback purposes)
- Collateral loan services
Tailored Personal Loan Consultancy Services
What sets Bluebricks apart is our specialised loan consultancy service. Our team of experts is well-equipped to recommend a loan product tailored to each individual’s unique circumstances.
Examples of factors we consider include:
- The specific loan amount you require.
- The urgency with which the loan amount is needed.
- Whether you or your parents own a property that has been held for over ten years.
- Your income level.
- Your CTOS score (such as your credit score and credit history).
By taking all of these variables into account, we aim to guide clients toward the most suitable loan option, assisting them in their journey toward financial stability and debt freedom.
Personal Loan for Credit Card Debt – FAQs
Navigating personal loans to pay off credit card debt can be a complex endeavour.
To help you make an informed decision, we’ve compiled three questions on personal loans for credit card debt in Malaysia to help you take a confident step toward financial freedom.
Opting for a personal loan for credit card debt is a wise choice if you can:
- Obtain a lower interest rate.
- Reduce the number of payments you have to make.
- Avoid the hassle of dealing with multiple banks.
- Simplify payments, especially if you have seven or more cards.
However, it also depends on your personal situation, loan offers, and preferences.
For example, if you have a poor credit history, you may have difficulty getting approved or face higher interest rates and fees.
In Malaysia, taking out a personal loan to pay off credit card debt could help improve your credit score in several ways.
For example, by using a personal loan for your credit card balance, you can lower your credit utilisation ratio, positively impacting your credit score.
What’s more, diversifying your credit mix can also be beneficial.
Having a variety of credit types—like credit cards, personal loans, and instalment loans—can demonstrate to creditors that you can handle numerous kinds of credit responsibly.
Other than applying for a personal loan for credit card debt, you can also settle your outstanding credit card balance by:
- Applying for a debt consolidation loan.
- Undertaking a credit card balance transfer.
- Seeking professional help from a financial advisor.