Credit cards are a convenient way of making your purchases. They enable you to enjoy your shopping or dining needs without the need to carry any hard cash or withdrawing money from your account. However, many people do not realise that credit cards have the highest interest rates..
Financial institutions and banks that offer cards in Singapore have been restructuring themselves to meet the growing needs of customers. In the process, the amount of credit card debt has seen a rise too. While it is difficult to stay away from loans or credit, steps should be implemented to plan your finances so that debt does not reach an alarming level.
Spending 35% to 40% of your monthly income: A credit card usually has up to twice the credit limit of your monthly income. Hence, it is important that you plan your card spends carefully. Any card spends amounting to more than 50% of your monthly income may badly affect your finances for the entire month.
The minimum monthly payment charged by banks is usually 3% of the outstanding balance amount. Banks also levy interest charges and late payment fees on your outstanding balances or balances from your previous month. These charges can elevate your debt level when you have a higher spending of 50% or more. Your finances can be easily managed if it is less than 35% to 40% of your monthly income.
You can get cash advances up to a certain percentage of your credit limit. While cash withdrawals are always helpful during emergencies, it is equally difficult to repay the exuberant charges that are levied on them. You should be aware that cash withdrawals can attract an annual charge of 28% that is calculated on a compounding rate.
Apart from this, handling fee or withdrawal fee is also applicable. Handling charges may amount to 5% or 6% of the amount withdrawn based on your card subject to a minimum charge of S$15. This means that you will be paying a huge amount towards your interest.
The interest rates on cash withdrawals can be even more alarming when you already have outstanding balances from your previous month. Avoiding cash withdrawals can prevent any unwanted debts.
If you have a credit card with higher annual interest rates, you can always talk to your bank and negotiate the annual rate of interests that is charged. Factors like your credit score and financial history are taken into consideration while negotiating the interest rates.
If you have a good credit score, you stand a good negotiating chances with the bank or financial institution. A higher annual interest rate may require you to pay more to the bank. This can pile up your debt.
Financial discipline is extremely important when you have multiple cards. Proper planning and utilisation of multiple cards can give you a good credit score. However, if this does not happen, you may end up with unwanted debts that may drain you financially.
You will need to understand that every card will have an annual fee, late payment fee, cash withdrawal fee, foreign transaction fee, and other charges that are applicable.
When these fees, interest rates, and balances from various cards are levied together, this may result in huge financial debts. Hence, it is always better to limit yourself to fewer cards as managing them will be a lot easier.
Often you may end up buying various things you don’t need using your card. You should always remember that your credit card should be used for convenience of payment and not reckless spending. You should always try to make purchases that you can afford to pay quickly. This means that post the interest-free period, you will be charged interest at a compounding rate on your outstanding balance.
When you have multiple cards, it is crucial that you understand the terms and conditions that these cards have. If you are frequently using your credit cards for your shopping spree, you must also have a clear understanding of the charges or fees that will be levied on you. These charges can add up to your debt pile up. If you have a vague understanding of the charges, it is never too late to approach your bank to learn about the terms and conditions.
You should always make it a healthy practice to clear your outstanding balances as soon as possible. If you only pay the minimum amount due, you will end up paying higher interest rates. Sometimes, you will find that the fees and the penalty amount will even exceed the principal amount you owe to the bank.
Credit cards are indeed a great way to take care of your spends and purchases. However, you must understand that it should be used responsibly. A carefree card spending with undisciplined repayments could result in debt pile up or a debt trap. The above factors discussed should give you an idea of managing your finances well.