Away with debt—how to REALLY use your credit cards. By Yong Yung Shin,Ramesh William, Celine Teo and Abhishek Mehrotra. Illustrations by Richard Lee. i-s mag
Debt is a necessary evil for many of us these days. However, with the latest numbers from the Monetary Authority of Singapore showing that the amount of rollover balance (read: Outstanding credit balance brought over to the following month) has hit an all-time high of S$3 billion, with a steadily rising number of delinquent credit card holders, it may be wreaking more evil on our society than necessary.
While credit cards often get a bad rap for creating debt traps to ensnare unwary cardholders, the fact is that they can also be used to help you clear your debts faster by helping you save more—if you truly know how to make full use of them. Here are some tips to getting the most out of your credit card and the caution signs to look out for, so that you do not spiral into debt while making that swipe.
Tip #1: Use balance transfer offers wisely
This credit tool is available at most major banks—it allows you to transfer your outstanding debt from one credit card to another card, in view of the better or zero interest rates offered by the new card. In other words, it gives you an interest-free loan for half a year. The current balance transfer offer from the Development Bank of Singapore (DBS), for example, lets you enjoy an interest rate of zero per cent for six months.
If you have a $20,000 outstanding balance at another bank that is accruing a horrendous 24 percent interest per annum for six months, you can halve that interest by halving your balance. Transfer $10,000 out of that debt out into a new credit card account with DBS, tighten your belt and pay off that $10,000 within the six months, interest free period. The $10,000 loan sitting in your former account will cost you $1,200 in interest while tthe balance transfer account will only cost you a $250 one-time administrative fee. Total savings: $950.
While it can effectively help you clear one debt, the balance transfer system can weigh you down with a new debt if you are not cautious enough—it happens when you make purchases with your new credit card before your transferred debt has been paid up in full.
Never ever make any new purchases on the new credit card, as you will not be able to pay back that credit purchase (while it’s sitting there being subjected to that annoying compounded interest effect) until you settle your transferred balance in full.
Tip #2: Choosing credit cards that suit your lifestyle
While the latest data from the Credit Bureau (Singapore) shows that around 80 percent of delinquent card holders hold credit cards with at least two banks, it does not mean that having multiple credit cards is a bad thing. The key is to find cards which offer features that fit your lifestyle and pattern of spending.
For example, if you are a frequent traveler, consider a card with frequent flyer miles or travel insurance as a reward. Good choices are UOB, Citibank and American Express, the last of which offers the KrisFlyer Gold credit card that helps you chalk up free air miles. If you are a car enthusiast, DBS’ SAAB Visa Platinum card gives you rebates when you spend at SAAB automobile centres.
Resist the temptation to sign up for yet another credit card account because of gimmicks such as “exclusive privileges,” fabulous free gifts or simply if you have a compulsive obsession to fill up every card slot in your wallet. The more credit cards a person has, the more convenient it is to make a swipe purchase, thus the more debts there are to pay. And with varying repayment terms and dates for each account, it becomes trickier to juggle, leading to a higher chance of defaulting and snowballing of credit card debt. A good rule of thumb—if you can’t remember how much you charge to each credit card, you may be holding onto too many pieces of plastic.
Tip #3: Make use of cash-back schemes
Cash-back schemes can save you a substantial amount of money—by paying you a certain amount when you spend money. The POSB Everyday card, for example, gives you a three percent cash rebate for purchases at Watson’s and a five percent cash rebate for Carrefour. The cash rebates can then be redeemed against your bill or utility payments. To get the most mileage out of these schemes, refer to Tip #2—knowing which card suits your lifestyle best.
Always settle fully your outstanding balance—or you’ll be paying more interest than the cash you’ll be getting back. This should not be a problem at all if you are living within your means. Remember, no balance equals no interest.
Tip #4: Get hold of “Buy Now, Pay Later” offers
Such offers are usually made through a tie-up between credit card companies and merchants such as your local department/furniture/IT store. By charging your purchases to the card, payment for whatever you bought at the store is deferred interest-free for several months. In most cases, there are also discount privileges tied to the card memberships. The “Buy Now, Pay Later” mechanism, when used with self-control, can give you a lot of convenience and help you save a substantial amount. One example is the IKEA Friends Visa Card.
Be sure to read the fine print for hidden costs, and whether or not the product bought under this offer is refundable or exchangeable. Also, be extra wary about the expiry of the interest free period, and be committed to pay in full before the interest-free period expires. Sometimes, you may have to pay a penalty fee if you later choose to opt out of the monthly installment plan and make a full repayment.
Tip #5: Always pay more than the minimum sum
A cardholder who is in the habit of making minimum repayments every time runs the risk of falling into a ghastly debt cycle. This is because most minimum sums are so minimal (hence the term!) they barely do more than pay for the interest charges. As a result, the outstanding balance does not gets cleared, and with the next billing cycle, compound interest come into effect and the cardholder may find himself saddled with a much higher debt than his original sum. On the other hand, years of payments and thousands of dollars can be reduced simply by adding a few dollars to the payment. Always remember—minimum repayment equals maximum debt, and vice versa.
It helps to open a separate savings account so that the moment you get your salary, you can set aside a sum that goes towards repayment of your outstanding balance (not to mention that it’ll be kept safe from going into the cashier’s till).
Tip #6: Negotiate payment terms with the credit card company
It’s no secret that the credit card industry is extremely competitive—just look at the smarmy, fast-talking, credit card salesperson springing up on you on the streets. If you find yourself facing problems with your payments, talk to your credit card company. They are usually more willing to bend the requirements—such as lowering of installment payments or wavering of annual membership fees rather than having you close your account and go elsewhere. Maybank, for example, waives the annual fees as long as you use the card once every quarter.