You are fresh out of college, in a brand new job, and the master of your life. A friend suggests that you must get a credit card next, and multiply your financial freedom. You apply for a credit card and you get it without any hassle. You hold your new credit card and tell yourself, “Oh, baby I’m going to have fun with you!”
Hold that thought. We may sound like your parents, but you need to use that credit card wisely. You don’t want to end up as a statistic of credit card debt or overuse, do you? It’s very easy to lose control of your credit card use and end up with interminable bills. Here are some tips you can use to use your plastic smartly:
- Find the right credit card: It’s all fine to grab the first card that comes your way, but a little research and smart thinking will help you get a credit card that won’t just be your first card but also a rewarding card. Choose a card by checking the following points:
- Rewards: There are rewards credit cards, cashback credit cards, and miles credit cards, among other kinds. You need to decide what purpose you are going to use your card for, and decide the category of card based on that. If you are going to spend a lot on shopping and dining, choose a card that gives you higher rewards/cashbacks in these categories.
- Interest rate: Choose a card with a reasonable interest rate. Most credit cards in Singapore charge between 23% and 29% as interest rate. Going for a card with a lower interest will be better for you if you can’t pay the whole bill amount in any month.
- Annual fees: As a starter, you should look for a credit card with an affordable annual fee, which could even be offset through the rewards and cashbacks you earn using the card.
- Don’t spend more than what you earn: If your monthly earnings are S$3,000, you should not spend more than that on your credit card. This is to ensure that you will be able to pay your credit card bills in full or at least more than half. Higher spending will leave you with huge bills that will accumulate high interest charges over time and prevent you from being debt-free in the short term.
- Create a budget: If you are not sure how your spending pattern could harm your credit history, you should make a monthly budget of items you need to buy, and plan your expenses in advance, while keeping a small margin for unexpected expenses such as medicines and hospital visits. Money management is very important for first-time credit card users as it is very easy to let your plastic do the talking at stores.
- Never pay just the minimum payment required: Let’s say your credit card bill for a month is S$2,868, and the minimum payment required is S$172. This is the minimum payment you need to make to the bank to keep the card active and avoid a payment default. But this does not mean that this is all you need to pay in the month. If you pay only S$172 out of S$2,868, you’re carrying over S$2,696 to the next month. This outstanding amount will attract interest charges, which range from 23% to 29% per annum. So the next month, your bill will have outstanding balance from the previous month, interest charges, and new transactions, which cumulatively, would be a high amount. This is how you unwittingly enter the credit card debt trap. So, stop paying the minimum amount due every month and pay as much as you can. The ideal situation would be that you pay the whole bill every month.
- Never make late payments: Pay your bill on time. When you get the credit card bill, note the due date and keep a reminder on your phone about it. If you have resources when you get the bill, pay it immediately so that you leave no scope to forgetting. The banks will charge you S$60-S$80 as late payment fee if you are unable to pay your bill by the last date specified. This will be an unnecessary addition to your debt.
- Watch your credit limit: Credit limit is the maximum amount you can spend using a credit card. This is usually limited to 4 times your monthly income. So if your income is S$3,000, your credit limit might be S$12,000. Ideally, your credit card utilisation should not be more than 30% of your credit limit. This will ensure that you will be able to pay your bills regularly and in full. Aiming for low credit utilisation also helps you keep your budget realistic. Check your credit card statement every month to see how you’re spending and how much of it you can avoid.
- Never withdraw cash from credit card: Cash withdrawals from credit card are an easy means of taking a short-term loan. But you should not use this facility unless absolutely necessary. This is because cash withdrawals come at a higher interest rate than your credit card (around 2-3% more), and the banks also levy a cash advance fee of 5% to 6% of the amount you withdraw. If you are in need of money, you should look at personal loans that come at a much lower interest rate and can be processed within 1 to 3 days.
- Read the fine print: You might think that pages and pages of cardmember’s agreement and other literature that your credit card company sends you via snail mail or email is boring, but these documents will contain a lot of information that you may not know about your credit card. There might be a lot of useful information as well – such as promotional offers; special discounts and deals in shopping, dining, travel and other categories; terms and conditions regarding rewards, cashback or miles accrual; updates to rewards systems, and fees structure – among other things. If you want to use your credit card in the best way possible, you need to pay attention to communication from credit card issuers.
- Practise safe and secure card usage: Make sure that you are aware of how to ensure the safety of your card. Do not share your PIN with anyone, do not write your PIN anywhere, do not allow anyone else to use the card without you being present, and when using it online, use secure gateways and one-time password verification, and don’t save any password on the browser. Subscribe to the SMS alert facility so that you get a notification every time the card is used. This will help you catch unauthorised use.
- Remember the credit score: Once you get a credit card, you’ve officially entered the credit market, and the Credit Bureau Singapore (CBS) will have a file in your name thanks to inputs from your bank. Your credit behaviour – how much of the bill you pay, whether you delay payments or default on them, whether you’re overshooting the credit limit – these get recorded in your credit report from time to time. Based on these personal financial information, the CBS comes up with a credit report and credit score for you, which determines your creditworthiness and risk level as a customer. This score is very important when you’re applying for more credit cards or loans in the future. Banks will not approve your loan if you score is poor. So sensible credit card usage is important for your overall credit portfolio.
These tips are designed to help you understand credit and credit cards, and to ensure that you do not end up debt-ridden. Financial freedom is not about being able to spend as much as possible, but about being able to know how to spend and how much to spend.