You’ve probably heard about the amazing (and dangerous) things credit cards do. On one hand, they can grant you bonus miles on your flights or cashback on your cinema tickets. On the other, they can fuel spiralling debt and have creditors chase people down, as you see in movies.
The truth is that like any tool, there’s no doubt that they can be very helpful or very dangerous, depending on how you use them. But wait, what exactly are credit cards?
A credit card is a form of borrowing that allows you to borrow up to the credit limit set by the credit card company. Whatever you pay using your credit card (also known as charging to your credit card) goes into the outstanding or unpaid balance. It represents what you owe the bank.
Available credit in the credit card is the amount you can spend before you hit your credit limit. If your credit limit is $1,000, and you’ve already charged $300 to your card, your available credit is $700. If you make a $200 payment, the credit limit will go back up to $900. (This is why it has the name “revolving” line of credit).
Here are some other common types of credit card, besides the vanilla, bank-issued ones (many of which also offer points, perks and rewards):
Reward credit cards offer rewards for their users, including cashback, statement credits or points for flights and hotel stays with selected partners. The rewards keep getting better with time and responsible usage. Nowadays, merchants collaborate with credit card companies to offer benefits like cashback, shopping offers and minimum purchase rewards to customers - sometimes issuing their own, reward cards. These act as customer incentives to enjoy more sales and customer loyalty. Such cards offer benefits centred around their target audience.
Examples: Singapore Airlines Krisflyer card issued by American Express, Citi Lazada credit card issued by Citibank and many more. Another type of reward credit card is one that has a specific target audience like Women, Children or the Elderly. UOB’s Lady’s Card, DBS’s Woman’s Card, DBS Live Fresh Student Card, and HSBC’s Revolution Credit Card. Such cards offer benefits centred around their target audience.
Whereas most credit cards are “unsecured,” secured credit cards are meant for riskier borrowers who may be more likely to default on their borrowing. As such, to get these cards, a security deposit is needed. An upfront deposit serves as your credit limit. The credit limit is usually about 80% to 100% of the fixed deposit collateral.
Examples: UOB’s Lady Card, DBS Altitude card, POSB Everyday Card, and UOB PRVI Miles Card.
Charge cards are not credit cards but are not too dissimiliar. The main difference is that you can’t carry a balance from month to month, meaning you must always pay the statement balance in full by the due date.
You can apply for a credit card from any credit card issuer or bank. The credit card issuer or bank will then assess your income and repayment ability by, among other things, reviewing your credit report. If your application is accepted, you'll receive a card with a fixed credit limit.
#1 Handover: You make payment with your card.
#2 Validation: The merchant then sends your information out over a secure internet connection to validate your account and confirm with the issuing financial institution (FI) or bank whether to let the purchase go through or not.
#3 Debit: assuming that your credit card isn’t declined, then the purchase price is debited from your account. You get your stuff, and the merchant gets paid minus some processing fees. Every time you repeat Steps 1 through Step 3, your additional purchase amounts are added to your account. At the end of the month, you’ll have to pay up via Step 4.
#4 Bill: every month, the FI or bank that issued your credit card will send you a bill that includes every purchase made during that month. The credit card issuer will show your balance due and the monthly minimum amount owed.
The majority of banks in Singapore calculate the minimum sum at 3% of the outstanding amount or $50, whichever is higher. Be sure to check what these terms are before you sign up.
Say, for example, your credit limit is $5,000. If you spend $1,000, your minimum amount due would be $50 and not 3% ($30).
If you just pay the minimum amount (or anything other than the full amount), you will incur a financing charge for the remaining balance. Interest for the balance is calculated starting from the statement due date and will be reflected in your next monthly statement. If you keep on paying only the minimum amount due every month, your financing charge (i.e. the interest) is compounded. This can turn out to be very, very bad news as the interest rate tends to be very high.
Say, you recently got a credit card with a credit limit of $5,000. The monthly spending on the card is about $1,000, the interest rate is 25% per annum, and the minimum balance that has to be paid monthly is $50.
The graph below shows that by only paying the minimum balance, you’ll end up incurring $2,398 worth of interest on the credit card in just two years!
Chart for illustration only - actual charges and credit card company behaviour will vary
However, paying off your statement balance in full each month means you can completely avoid paying any interest. That’s because most credit card companies don’t charge any interest until after your statement’s due date. So if you pay the bill in full, you won’t pay a penny in interest. This “grace period” is one of the best things about responsible credit card use.
#5 Credit History: An underappreciated but very important part of using credit cards. Every time you pay your credit card bill on time, maintain a low credit card balance or (preferably) pay your balance in full each month, you’re building up your credit rating. Having a good credit history shows banks and other financial institutions that you’re financially responsible, which will make it easier and cheaper for you to borrow money for major purchases (such as property or a car) in the future.
For instance, Singapore requires credit card candidates to have surpassed the minimum age of 21 years, have an annual income of a minimum of S$30,000 or more (depending on the card type), have a stable income source, and a specific number of years’ good credit history.
While it’s not abnormal to suffer a cash crunch, it’s important to understand that not paying your credit card bills is not a way out. In fact, it's one of the worst things you could do. Credit cards are not designed for long-term loans, at least from the cardholder's perspective, given the high interest rates they charge (APR). If you do absolutely need to borrow money, instead consider personal loans (as these typically have lower interest rates).
If, for whatever reason, you really can't afford to pay your credit card bills, suggestion #1 is to act quickly, while you may still have time to regain some control over the situation. Swallow some pride and contact your credit card company (or companies) to clarify the issue and devise a plan, as many offer some assistance, including skipping a few payments without penalty or possibly reduced interest rates. In most places, you could also contact a free, nonprofit credit counselling service for more guidance.
Help: You can contact Credit Counselling Singapore (CCS), a non-profit organisation and registered charity - https://ccs.org.sg/.
We recommend that you use credit cards as a mode of payment only. In other words, use your credit card to purchase things and also get rewards and discounts at the same time. However, pay off your monthly bills in full (and, importantly, on time) so there is no interest charged. Paying just the minimum or making late payments are a bad habit to slip into. The amount owed from interest and late payment fees will accumulate the longer you leave your credit card balances rolling over. Credit card interest rates can make it easy for debts to snowball into an amount you can’t manage.
Before applying for a credit card, you should first consider whether you’ll be able to use it responsibly. Will you only charge what you can afford, so you can pay the balance on time and in full each month? So if you can utilise credit cards responsibly, then they’re powerful financial tools that can serve you for years to come.
Credit cards exist so that credit card issuers can make profits from their customers.
The customers who make credit card companies their profits are those who pay late fees and interest. Credit card companies make significantly more money from interest charges than they do from fees (paid by the merchants accepting their cards. Basically, these poor, unfortunate, interest-paying victims pay for all the costs of running the business* and more. Don't be one of them!
* These costs include running the business for all cardholders, including the smart and disciplined ones who pay off their balances on time every month and therefore don't pay any interest or late fees at all... hopefully cardholders like you!
A GUIDE TO CREDIT CARDS. COMPLETED ✅
SOURCES
MoneyFitt (ProConnect Technologies Pte Ltd) is not responsible for any errors or omissions, or for the results obtained from the use of this information and shall also not be liable for any damage or loss of any kind, howsoever caused as a result (direct or indirect) of the use of the app and its features, including but not limited to any damage or loss suffered as a result of reliance on the app. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. The information contained is not intended to be a source of advice or credit analysis with respect to the material presented. Any ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial, tax or legal professional and independently researching and verifying information. We do not provide any financial advice, nor are we licenced to.
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