• Common mistakes leading to heavy Credit Card Debt

    Credit Card BYTES FROM OUR KITCHEN

    Credit cards offer users a world of benefits. They reward the cardholder for every expense charged to the card right from earning reward points to racking up AirMiles and even earning cashback. Credit cards also give cardholders the benefit of purchasing any service or good at a time where they don’t have access to cash. But credit cards and the convenience they offer come at a price. Credit cards can quickly become instruments of debt and thanks to their compounding interest, make it harder to pay off. Below are common mistakes cardholders need to avoid to stay debt free.

    Overuse of the Card: This mistake is a trademark of bad credit card usage and if left unchecked can lead to a huge credit card debt. While many advocate the use of credit cards for everyday expenses such as groceries, dining expenses or fuel, the card should be used in moderation, if at all. The credit card issuers know for a fact that these charges comprise a majority of our expense and hence offer rewards on such expenses. Credit cards offer cashback or reward points on such common expenses further encouraging the cardholder to swipe their cards. Credit cards like the Citi Cash Back Card provide 8% cashback on grocery shopping and dining expenses and while this may sound great on paper, earning these rewards come with its own set of criteria which can bring up the daily expenses. Smaller daily expenses should be paid for with cash wherever possible and cardholders should resist the urge to swipe their card needlessly.

    Swiping for the Reward: Credit cards seem to have no dearth of promotions and offers. Every card comes with promotional discounts at select locations or have joining bonuses that offer thousands of frequent flyer miles upon successful approval. “Apply Online and get Cashback” or “Get this Discount when you dine in this location” or “Get free luggage bag”, the list of promotions go on. And while there is a small minority of the population that chase such rewards and hold multiple cards just for their joining perks, these cardholders often cancel their card just before paying off the annual fee or utilize the card only till they earn their rewards and cancel them. For everyday users, this is not an option. Opting for a credit card just because of the advertised offers is a foolhardy way of landing in debt. Not only do these promotional offers come with strings attached but cardholders will find themselves altering their spending patterns to earn these rewards thereby bringing up the total balance owed on the credit card. Cardholders purchase items in hopes of getting the rewards but soon realise that there are certain spend requirements they have to meet. This results in an increase in expenditure and when cardholders fail to make full payments on their monthly statement, the interest charged on the balance eats away any perceived benefit the card would have provided.

    Making Minimum Payments: Probably the leading cause for racking up debt, making minimum payments on an outstanding credit card balance is a sure fire way to prolong time taken to clear the balance, increase the amount of interest paid and if the balance is big enough, snowball it into a very large debt. The problem with making minimum payments is that majority of the amount paid only goes towards servicing the interest. The remainder of the balance attracts interest and this compounds when the cardholder continues making minimum payments. Consider a case where an OCBC cardholder charges a dinner expense of S$300 to the card. Assuming he makes the minimum monthly payment of S$50, the balance of S$250 will attract an interest rate of 25.92% p.a. which amounts to S$6.48. Moving into the next month, the cardholder makes another minimum payment of S$50 and the balance of S$206.48 attracts interest yet again bringing the total amount owed to S$212.96. The overall interest the cardholder would end up paying is S$39.03 on a charge that was only S$300 to begin with. Apply this to a case where the cardholder has a balance running into the thousands and it’s easy to see how making minimum payments on the balance will land the cardholder in debt.

    Interest Rates and Impulse: One of the upsides of owning a credit card is being able to purchase items even when cash is not readily available. But the problem with the ‘Swipe Now, Pay Later’ policy is that cardholders eventually have to pay the balance with interest or any other charges that may be applicable. A common mistake of cardholders is firstly not shopping around for the right card. A card with higher rates of interest can quickly offset any great benefit or reward it may advertise. The higher the interest rate charged, the more the cardholder ends up paying and while smaller charges may be manageable, the true problem arises when cardholders bite off more than they can chew. Impulse shopping and buying something that they couldn’t afford in the first place can seriously set them back on their payments. Credit cards provide the cardholders with a false sense of purchasing power. When cardholders purchase something that they otherwise do not have the cash for or make a big ticket purchase which takes them years to pay off, it leads to surmounting debt. What’s worse is by the time they’ve paid of all the interest that’s accumulated on the purchase over so many months, cardholders would end up paying 30% to 40% more than what the item actually cost.

    Making Cash Withdrawals: A big no when it comes to using credit cards is making cash withdrawals. Just because you can doesn’t mean you should. Cash withdrawals made on a credit card charge a higher interest rate than other transactions made on the card. Credit cards from OCBC charge a whopping 28.92% interest rate per annum and unlike interest on card transactions that kicks in when cardholders don’t pay their balance in full by the specified due date, interest on cash withdrawals start from the date of making the withdrawal to when it has been fully repaid. Not only does it have higher interest rates but charges quite a high cash withdrawal fee, with most cards charging a minimum of S$15 or 6% of the amount withdrawn. This results in cardholders having to pay a fee on every transaction which makes cash withdrawals a very expensive affair.

    Owning Multiple Credit Cards: While it may seem nice to have a wallet filled with cards, the truth is the more cards you have, the higher the chances of you missing payments are. It becomes hard to keep track of due dates and missed payments result in late payment fees being charged as well. Some banks also charge penalty interest rates and increased the prevailing interest rate by 3% and although the rates are revised to normal rates when the cardholder clears the missed payments, it does add to the cost. Another drawback of having too many credit cards are the annual fees a cardholder has to pay. With annual fees ranging from S$100 to S$200 on most cards, it is an added expense a cardholder can do without. Cardholders should limit themselves to one or two cards that cater to their needs.

    Credit cards have a propensity to rack up a huge debt but when used correctly, the benefits far outweigh the disadvantages. Being wary of the pitfalls can stave off credit card debt and allow cardholders to fully enjoy its benefits.

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