Monday Musings #6: Using Credit Cards Right

It’s too easy to get a credit card in Singapore. Even students who don’t have a job yet can get credit cards with a $500 limit. Most people have more than one credit card. Some people have ten.

Here are some scary statistics, taken off an online article.

The average monthly credit card balance is $5,488 today. (Straits Times, Jul 30, 2013)

The delinquency rate- where one’s credit card payments are 30 or more days overdue – was 4.95 per cent in the three months to March of this year. (Straits Times, Jul 2 2013)

Debts which are overdue by more than 30 days at the typical interest of 24 per cent per annum – plus monthly penalty fees – may indicate that the credit card holder may be in dire financial circumstances. The percentage of consumers that missed at least one payment on one or more of their credit card accounts in a year was 12.55 per cent in 2011.

Credit cards are great – you get discounts at certain restaurants/shops/cinemas, you earn points that you can redeem for vouchers, you earn rebates, you earn miles that you can redeem for air tickets, you get the convenience of paying for things without having to carry a lot of cash with you around (especially useful overseas)…

BUT they’re only great if you pay your credit card bills on time, in full.

Miss a payment and you get slapped with a penalty fee which can be $50 or more, AND you have to pay hefty interest on your outstanding balance.

If you can’t afford to pay off your bill in full and choose to pay only the minimum sum or part of the bill, you’ll still have to pay interest on the balance.

In both cases, you’ll end up spending even more instead of saving money when you use credit cards.

If you’ve been following my blog, you’ll know that I wrote earlier about how I succumbed to temptation and used my credit cards unwisely, spending more than I could afford to and ending up with significant credit card debt that took me a while to pay off.

I’m writing this because credit card abuse is so rampant in Singapore, and the number of bankruptcy cases is rising. Too many people think that it’s okay to spend future money (charging purchases to a credit card when they don’t have cash in the bank) because they have a job and they can pay off their credit card bill later on when they get their salary. What they don’t realise is that it’s not healthy to live from paycheck to paycheck like this. We need to have savings, and we shouldn’t be spending 100% of our income every month (worse still, spend 200% or 300% by charging everything to different credit cards, each with a credit line of 1-2 times their salary and thus effectively spending like 5 times their salary).

Having been through credit card hell once, I never want to go through it again. So I only charge to my card what I know I can afford to pay in cash. If I have the cash, I’m charging to my card only to enjoy the perks that come with the card. I can then easily pay off my credit card bill without incurring penalty fees or interest charges.

While it’s also tempting to apply for different credit cards because there are so many available, each with different attractive offers, I limit myself to just three cards. Too many and I’ll end up mixing up the payment due dates (different depending on the card) and incur late penalty fees, or I’ll end up being charged a fortune in subscription fees.

P.s. Every year, the credit card companies also charge a subscription fee. You can easily get it waived (saving hundreds of dollars) by calling up the companies and requesting for a fee waiver.

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