From The Straits Times    |

In responsible hands, a credit card is a helpful financial tool. But without discipline and self-control, credit cards can lead to debt. According to the latest report from Credit Bureau Singapore, 85,352 Singaporeans have unsecured debt and have missed two or more months of their credit card payments.

Whether it’s due to carelessness or confusion, daily compounding interest makes debt snowball quickly. Fortunately, the MAS’s new restrictions place tighter limits on how much Singaporeans can borrow, while a repayment assistance scheme helps manage debts. However, avoiding credit card debt is a simple matter of responsible use.

Start by watching out for these common credit card mistakes:


Mistake #1: Missing Your Bill’s Due Date

The cardinal rule to owning a credit card is to pay your bill in full and on time. When you miss a payment, interest gets added onto your balance and grows each day you leave it unpaid.

Let’s say you used your credit card to buy a pair of limited edition Adidas Stan Smiths for S$500. If you pay the S$500 by the due date, you have no interest or fees to worry about.

However, if you miss your payment, you get charged a S$60 late payment fee. The S$500 also gets subjected to a high-interest rate of around 25% per annum, which compounds on a daily basis. This means you pay interest upon interest until you can pay the balance in full. But because your debt continues to grow at this point, making full payment becomes increasingly difficult.

The Solution:

It’s as simple as paying attention to the “Payment Due Date” on your credit card statement. Create calendar reminders on your phone so there’s no way for you to forget it.

Alternately, you can use your credit card as though it were cash by transferring the money immediately after using it. It will appear as credit, and gets automatically deducted during bill payment.

This ensures that you always pay on time while earning credit card perks like air miles, cashback, or rewards points in the process.

Mistake #2: Making Only the Minimum Monthly Payment

Making the minimum payment can be a quick fix to a growing debt. However, this does not exempt you from the effective interest rate on your remaining balance.

Let’s say you can only afford to make the minimum payment on your credit card, which is usually 3% or S$50 (whichever is greater). In this case, your minimum payment for the Stan Smiths is S$50.

Making the minimum payment lowers your outstanding balance to S$450.00, and lets you avoid any late payment fees. However, your outstanding balance will still be charged the 25% p.a. effective interest rate, which compounds daily.

The Solution:

If you can’t pay your credit card, contact the bank immediately and see if you can renegotiate the terms. They may be able to help you restructure your debt or even lower the interest rate.

Another option is to use an interest-free balance transfer. This is similar to a short-term (3 to 12 months) 0% interest loan commonly offered on a credit card or credit line account. As the name suggests, a balance transfer allows you to transfer all your outstanding balance to a low or 0% interest rate loan. 

This means that you can pay your outstanding credit card balance while neatly avoiding the 25% p.a. interest that would have been charged onto it. Check out this article for more information about how balance transfers help you manage credit card debt.

Mistake #3: Using Cash Advances

If you’re strapped for cash in an emergency, resist the urge to get a cash advance on your credit card. With up-front fees and high-interest rates, a cash advance can make your debt balloon unless you pay the full amount on time.

If you’re absolutely sure you can pay the full cash advance by the statement due date, you have nothing to worry about. But if you needed a cash advance during an emergency, it’s likely you don’t have the funds to pay what you owe on time.

Cash advances typically have higher interest rates at around 28% p.a., which compounds if charges are not repaid in full. This can add up to a significant sum.

The Solution:

Avoid using your card as a source of credit by building an emergency fund. Ideally, this should make up 6 months of your income, and kept in a place that’s easily accessible. For as long as you have an emergency fund, you have the means to handle almost anything life throws your way.

Try a personal line of credit if you need cash urgently. A credit line is a personal loan that lets you borrow cash up to 4 times your income, which you can withdraw from an ATM.

Unlike a cash advance, credit lines have no withdrawal fees and charge an interest rate as low as 8.8% per annum. This option is much kinder to your finances, assuming you can pay back the full amount on time.

Mistake #4: Getting Swayed By Welcome Offers

Many Singaporeans get a credit card because of the free luggage or cashback incentive that comes with it. While there’s nothing wrong with wanting these perks, it’s a mistake to choose a credit card for the welcome gifts alone.

For one thing, welcome offers come with several strings attached. You may have to make a minimum purchase within the first few months, which can range anywhere from S$500 – S$1,000 per month.

Credit cards are most useful when they give you rewards for something you already spend on, such as cashback for groceries or dining. But they’re not worth getting if you overextend yourself just to get free luggage. It may even cost less if you buy it yourself!

The Solution:

The best credit card gives benefits beyond the welcome offer. You should only get a card that lets you save on stuff you already spend on.

Before applying for a card, understand your spending patterns and figure out where most of your budget goes. Is it on groceries? Travel? Retail shopping?

Compare credit cards and find one that will reward you with discounts, air miles, or cashback for spending on these items. Many of these cards come with welcome offers, which makes owning it even sweeter. But welcome gifts must never be the primary reason for getting a card.

Mistake #5: Owning Too Many Credit Cards

If your wallet is thick with 5 or more credit cards, you increase your chances of missing a payment.

Each credit card has its own billing cycle, which is activated from the moment the card is used. You generally have 27 to 31 days to pay the card before the interest rate is applied. So you can see how juggling several credit cards can make payments hard to track.

You’ll also need to pay annual fees for each card, which range from S$100 – S$200, depending on the card. While it’s fairly easy to negotiate the fee, is it really worth calling five or six different credit card providers every year?

The Solution:

Marie-Kondo your wallet by putting all your cards on the table, holding each one up and asking yourself if this card “sparks joy” by helping you save money.

As a general rule, two credit cards is enough for most Singaporeans. The first credit card should be a cashback card that gives you rebates for everyday expenses like groceries and utilities. This is typically 6 – 8% of what you charge to it, often capped at S$80 or less each month.

Your second credit card should be for the biggest portion of retail spend. If you spend most of your disposable income on restaurants, for example, there should be a dining credit card that gives you restaurant discounts or cashback. If you like to travel, your second credit card should help you earn air miles when you spend in Singapore.

Cancel any credit card that doesn’t bring you any savings, and keep two at most.

From personal loans to the best credit cards in Singapore, helps you to save money. Start comparing today!