Budget 2010: Credit Card

Credit Card - Life of Banks

The most talk-about topic of the boring 2010 Budget is the Credit Card's Service Tax. Rm50 for principal and Rm25 for every Supplemental card. I believe almost every qualified person on the street owned at least one card. And, many of us own more than what our purse can accommodate.

If this new policy is to be inforced starting next year, what's the impact?

1. Banks: CC is a new income source for banks. If we took the interest off the picture, I think it's fair enough that CC makes consumers more convenient, and banks charge merchants for using their credit service. For those banks which are promoting their CC heavily sure would suffer a massive blow. NO new card application + Card cancellation = Problems
2. Cardholders: For sure, actions will be taken to cancel as many cards as possible. Unused cards sure not a problem, but how about those with installments? Congrats, you are forced to continue and pay Rm50 extra. How about those who still have CC debts and can't afford to settle it fully? Congrats again, you are forced to have more debts every year.
3. CC sales person: For every new cards cancellation within 6 months, commissions will be crawled back by issuing banks. Busy calculating now?

Government said this is a Rakyat-Friendly Budget, and I'm not surprise, since this service tax is successfully link with almost all of the Rakyat (But, it's not Friendly either). The objective given by government is to discourage citizen to ride the CC debts, which can leads to bankruptcy. However, these kind of policy would worsen the situation only by adding Rm50 more debts for each card.

So, should this be implemented? And, how should it be implemented?

YES, to induce a better CC culture, we should implement it. However, we should be fair to those who are using credit cards correctly. Example, Rm50 should only charged on the 3rd cards onwards instead. I think 2 cards per person is reasonable. Or, we can raised the card's application requirements and stringent the approval process. In other words, lending money to affordable cardholders only.

Are there any more Upside?

Right after the worst bear-run of the century, 2009 seems to be one of the best year in history of Stock Market. Although unexpected, the bull rally almost unstoppable yet.

Will it last? Or, when would it last?

W, V or L shape recovery is a hot topic among investment community. Anyway, all of this is depending on the basic fundamentals of the economies.

1. the current bull-run is started just because of the low-base effect in terms of pricing. When stock prices are so low after 2008, many people became Warren Buffet - with no fundamental checks. They bought because of the stock prices only. And, they make some profit though. Not a bad investment, if they are lucky as far as I concerned.
2. after the first phase of recovery, the second phase is earning potential. This is the phase where we must go back to the fundamentals of a company. Earnings growth is what will drive the share prices higher after the first phase.

This is why share market traded range-bound now (Oct 09). What would excite the Bull to run again is earning growth. Public Bank and glove companies are the main drivers of KLCI last week with positive earning growths. However, any setbacks will pull us down as what we saw in US, where Bank of America and General Electrics reporting disappointed results.

Conclusion: Do not look at the price from now onwards. Instead, look at the earning power of your favourite counters. Yes, there is further upside with earning as its ingredients.

Do share your stock recommendations, which you think have good potential here.

Banks Offering Higher FD?

Hurray!!! Even though economic crisis is still following us closely, banks are willing to offers higher Fixed Deposit (FD) rate. Sounds good?

However, let us look at this "exciting" offers first before making any decisions. Normally, banks are offering enhanced returns for those who also buy unit trusts or insurance products. They bundle these products, in order to give consumers special FD rates. But, is that your cup of tea?

YES, if you:

• need to buy an insurance and have extra money to put into FD
• need to invest into unit trust and have extra money to put into FD

NO, if you:

• want to buy insurance only
• want to invest into unit trust only
• do not want to lock-in your cash in FD

Do take note on the terms set by banks, such as the ratio of FD:UT / FD:Insurance.

For instance, the insurance products bundled are higher in premiums.

While for Unit Trust, ratio is directly affecting your return.

For example, RM100k are divided into 4:1 ;

RM80k FD and RM20k UT

Enhanced FD 3% and UT 10% (I'm very kind though)

Total profit is RM4,400 (80k x 3% + 20k x 10%)

However, the real return is 4.4% only (RM4.4k/RM100k)

If you includes the UT fees and the risks that you are taking, does it worth?

Also, some banks are giving special 1-month FD rate only instead of 1-year.

Do consult with your financial adviser for more. Your feedback is welcome.

Part_1: Investing with Insurance? Think again...

Many people mistakenly linking investment and insurance. Investing through an insurance policy is very popular nowadays. However, this could turned out to be a costly wrong move because:

1. there must be insurance charges (many agents always say FREE coverage), that's why the return will be based on % of sum assured.
   


2. there must be years of locking period (many agents say this is for long-term), where you can't get back your "invested amount" if withdrawn prematurely.
   


3. there is NO double-digit annual return ever. If yes, ask whether is it Guarantee? Written? If still yes, let me know and I will sign-up immediately.
   
   

So, be careful when you are dealing with these "financial providers". Insurance is a long-term thing. If you found out late, you will be penalised with $$$ or forced to continue for years.

*Hint: Insurance is for protection or long-term financial planning only. Not for investment.