Credit card growth has exploded in Indonesia over recent years as a rising middle class embraces its newfound affluence.
Credit cards reduce the amount of cash people need to carry and make it easier to shop online and book flights or hotels. They also enable people to purchase items weeks before having the cash to pay for them.
And the benefits do not stop there.
The two most widely accepted credit cards, Visa and MasterCard, are generally marketed to the public by banks, but sometimes these banks collaborate with individual companies to promote sales through customer incentives. A bank may work with an airline, for example, to offer large discounts on restaurant meals or access to airport lounges, which are a great value if you wish to escape the crowded public areas outside.
Many credit cards will also award points according to how much you spend with them. These points can be exchanged later for products or air miles.
If you travel internationally, it is hard to get by without a credit card. Without one, you cannot rent a car in most countries, no matter how much cash you can place on the counter. Using a credit card overseas also reduces the amount of foreign currency you need to take with you.
But despite the practicalities and convenience, credit cards have a dark side; using one is easy, but the consequences may not be.
Of course, if you pay your bill on time and in full, you won’t have an issue. Indeed, you will have enjoyed “free” credit for up to five or six weeks. (I say “free” because retailers often mark up the original prices to cover fees they pay to the banks or card companies.)
The real problem arises if you do not or cannot pay the bill in full. When that happens, interest kicks in, often at outrageous rates of up to 40 percent per annum. That may be manageable if you plan to pay for a major purchase over three or four months, but if not, the interest will rapidly mount.
Some have found a “solution” to this issue: They take out another credit card to help repay the first one. Inevitably, this method fails and the debt piles up even faster, leading to an endless cycle of debt with little hope of escape.
Credit card debt is not just a local problem. The United States, one of the richest countries in the world, probably has the highest average credit card debt, running at about $15,000 per person. But at least the United States has laws and self-help programs to help people get out of their debt.
The best way to avoid debt is by telling your bank to fully pay the credit card bill every month before the payment deadline passes. Of course, this requires you to closely monitor your spending and your bank balance.
Beyond debt, credit cards carry other dangers, and even if you are responsible with payments, you should be aware of several other pitfalls.
Credit card fraud is widespread and can be sophisticated, so be sure to take care of your card. While retail employees can easily copy credit card details, more advanced criminals have other methods. Sometimes, for example, they can copy cards by inserting a device in an ATM. Other times they may scan the Internet to look for transactions that have not been protected by a secure site.
Fortunately, banks will usually pick up the bill for a fraudulent transaction, but you must check your statement and immediately report any anomaly. If you are lucky, the bank will take proactive steps and contact you if it spots a suspicious transaction.
Protect and memorize your personal identification number and change it if you think it may have been compromised. And make sure you keep details handy of your bank’s emergency numbers so you can immediately call and file a report if your card is lost or stolen.
It is also a good idea to tell your bank if you plan to travel outside the country, or your card may be blocked when they spot a charge somewhere on the other side of the world. In such instances, a second card may be useful.
Some people would rather forgo credit cards altogether, trying to avoid the debt by using a debit card instead.
When you use a debit card, the amount you are spending or withdrawing is deducted immediately from your bank account. If your account lacks enough funds to pay immediately, the transaction is simply declined.
The problem is that some businesses, including many hotels or car rental companies, will not accept a debit card. This policy often stems from a fear that your account, which may have enough money at check-in time, could be empty when it comes time for the company to cash in.
A credit card, on the other hand, guarantees payment, so the hotel or rental company can get paid even if your account runs dry, leaving you to settle up with the bank.
For debt-conscious people, the solution is to use a debit card whenever possible but keep a credit card in your wallet.
So is your credit card a friend or foe? Like it or not, unless you have a very sheltered life, a credit card is now an indispensable part of modern living. Used responsibly, it can be a great convenience, actually saving you money and giving you access to creature comforts at airports.
But it can also become your worst enemy if you fail to keep it under control. Take charge of your card or cards; don’t let them take charge of you.
Colin Bloodworth is the president director of Professional Portfolio International Indonesia.