Credit Cards 101: 7 Key Terms and Features of Credit Cards

Simplifying payments with swipes and taps, but not without danger!

• Credit cards are a form of short-term borrowing that enables you to borrow up to the credit limit. The lender (usually a bank) sets a credit limit. Credit cards can be an easy way to get interest-free loans, valuable rewards, travel perks and shopping benefits. If used correctly, they can also help you build your credit score.
• But the costs far outweigh the benefits if you don't pay off your monthly balance. Any interest owed will quickly compound, and credit card companies usually charge very high interest in the first place! 
• Credit card companies make most of their money from charging interest to cardholders who do not pay off their bills completely and on time. Make sure you’re not one of them!

Key Terms and Features

1. Annual Fees

This is a membership fee that you have to pay to receive and use your credit card. Most cards have this, but many of those will have an easy way for you to call the bank to waive those fees each year. Card companies make money from you in so many other ways, after all, so they would do their best not to lose you. (It's incredibly wasteful if you don't take advantage of this fee waiver facility!)

2. Monthly Statement

Every month, the bank sends a monthly statement (i.e. bill) containing details of your monthly credit card spending. Keep track of how much you've spent and where. Pay great attention to it and let your bank know if there are transactions that you do not recognise or if anything is unclear. The payment due date is when the bank must receive full payment of your credit card bill to avoid incurring interest and late charges.

People often forget to check their bills, especially since most banks and credit card companies have been encouraging customers to "go paperless" to be environmentally friendly - digital bills on the app or via email with extra passwords are much easier to ignore. Check your bills!

3. Foreign Currency Transactions

Overseas purchases get converted to local currency in your statement. The foreign exchange rates used may vary from day to day and from bank to bank. They also usually include currency conversion charges or other administrative fees. Check with your bank for their rates and other fees, but you will see the local (overseas) currency charged in your bill (check your bills)!

Credit card exchange rates are usually horrible, so consider getting an e-wallet, as they have more consistently competitive and transparent exchange rates. If using your usual credit card overseas, make sure you always choose the local (overseas) currency to pay in rather than your own (home) currency. The rate will be better than what you will get if you choose the local option. 

4. Free Credit Period Before the Due Date

Upon receiving your monthly credit card bill, you’ll have a 20-25 day period, known as a free or "grace" period, to pay it (as long as it's by the Due Date) before the bank charges any interest or late fees.

5. Minimum Sum for Payments

By only paying the minimum sum due, the rest of your credit card balance will incur interest charges. Usually, the minimum sum is 3% to 5% of the unpaid balance, or a stated amount, whichever is higher.

One "trick" to avoid is the option to automatically pay only the minimum amount so you can avoid late charges. This is convenient, as late payments are bad for your credit score, but it's sort of a trap! If offered the option to make payment of the entire Statement Balance, do that instead! Just paying the minimum sum will mean you may incur huge interest charges on the balance rolled over into next month, and the month after, and, you get the point.

What’s more, you also shouldn’t select the option to make payment of the current balance, as it’ll mean you miss out on the free credit period for the sum between the statement and the current balances, though it's certainly not the worst thing you could do with credit cards. 

7. Gifts and Rewards

You "earn" gifts, cashback and bonus points pretty much as soon as you start spending on your credit card. Compare the different calculations of bonus points as banks have different reward schemes. Specific terms and conditions always apply. For example, cashback only after minimum spending levels offers which are not applicable on weekends, etc.

One popular strategy is actually to "Earn and Burn" which means don't sit on your points to let them build up, because, unless you have a specific big item to use it for... what's the point? 

8. Credit Card Instalment Plans

Anything purchased on a credit card instalment plan must be settled in full. Even if the merchant fails, you’ll have to keep paying the monthly instalments until the full settlement of payment.

• In-house instalment payment plan: involves a store offering to extend credit to their customer. Failure of repayment by the customer could result in the repossession of the item.
• Credit card instalment payment plan: the offer of credit between a credit card issuer and a merchant incentivises customers to use that credit card.

KEY TERMS AND FEATURES OF CREDIT CARDS. COMPLETED. ✅

Sources

1. https://www.investopedia.com/articles/pf/10/credit-card-debit-card.asp
2. https://learn.moneysmart.sg/credit-cards/credit-card-basics/how-do-credit-cards-work/
3. https://www.moneysense.gov.sg/articles/2018/10/understanding-credit-cards
4. https://www.creditcardinsider.com/blog/how-does-a-credit-card-work/#are-credit-cards-a-good-idea
5. https://www.moneysmart.sg/credit-cards/credit-card-bank-application-basics-ms
6.  https://www.singsaver.com.sg/blog/what-happens-when-you-cant-pay-your-credit-card
7. https://gendal.me/2014/08/09/
8. Cover photo from picjumbo