From the time credit cards have come into being, the debate on how to use them has also been in existence. We ask each other, we ask financial experts, and we ask Google whether we should use credit cards for large purchases or for smaller purchases. We at BankBazaar want you to keep some things in mind before you use your credit card for big-ticket purchases. Here’s some food for thought;
We easily misuse credit card as a debit card, without realising that credit cards are getting us into debt while debit cards will allow you to spend only as much amount as you have in your account. The prudent way to use a credit card is to spend only as much as you earn, i.e., like a debit card, but with an eye on how much you are spending. Make a monthly budget and stick to it. Do not buy something just because you can do it with a credit card. Ask yourself – if I didn’t have a credit card, would I have been able to buy this? Would I be able to pay it off in the next 2-3 months? So if you are going to make a large purchase – paying for a wedding banquet at a restaurant, for example – then you need to make sure that you have the resources to repay the amount as soon as possible and thereby avoid interest charge accumulation, late payments, and defaults.
If you’re one of those credit card users who only swipe their card for big purchases – like electronic gadgets, home appliances, flight tickets and hotel bookings – then you’re probably spending too close to your credit limit. For example, let’s say you bought a MacBook Pro for S$4,000 in October 2016, then a new wardrobe for your house at S$1,300 in November, and did your Christmas festival shopping for family and friends at S$2,500 in December. So in 3 months you end up spending S$7,800, which could be dangerously close to your credit limit (unless you are clearing the dues each month). Big purchases mean that you’re exhausting your credit limit faster. You might also end up spending more than your credit limit, and attract over-limit charges. Ideally, it’s good to keep your card utilisation at 30% of the credit limit at the most. So if you are making only big purchases on your credit card, high repayment ratio is necessary to avoid over-limit usage.
Another problem with making a lot of large purchases is that you may not be repaying the outstanding amounts fast enough to avoid interest charges. Credit card interest rates range from 23% to 29% in Singapore, so for S$7,800, as in the above example, you will invite approximately S$2,000 to S$2,500 in interest in a year. Unless you clear off your credit card dues each month in full, you are inviting high interest charges on the total amount. Interest charge accumulation will, in turn, hurt your repayment ability and lead to debt pile-up. Check your card’s interest-free period and grace period for payments before repayment to ensure that you are not paying extra fees to the bank.
If you are making large purchases, check what kind of rewards your card offers – whether it is reward points, cashbacks, cash rebates, air miles or promotional discounts and deals. For example, if you are shopping at a luxury outlet and your card offers 10 reward points for such purchases, then you will be saving money in the long run by buying that item on credit card. If you are paying for a dinner for 20 people in a restaurant and your card gives you 6% cashback on dining spends, you will benefit from charging the expense to your card. Also check the promotions being run by your card before you go spending so that you can avail the best deals for your expenses. It’ll also be good to see which cards give you purchase protection and extended warranty as they are useful for getting refunds and replacement on faulty products bought.
If your card does not offer enough perks on big purchases, then you should consider applying for a new card or transferring your balance to a card that suits your spending habit. For example, if you travel a lot and buy flight tickets and book hotel rooms using your card, consider getting a travel credit card instead of a cashback credit card or rewards credit card. On the other hand, if shopping forms your key purchases, then go for a cashback or rewards card.
If you’re unsure of whether you will be able to control your spending, choose a charge card instead of a credit card. Charge cards have a pre-set spending limit, which means that you cannot swipe the card beyond a certain amount. This will help control the shopaholic in you.
Read More: Credit Cards VS Charge Cards
All banks have one or more instalment payment plans. Though they are marketed as having 0% interest or very low interest, these cards in practice attract a fee higher than zero but lower than your credit card’s usual interest rate. Nevertheless, spreading your payment into multiple instalments may be cheaper than charging the whole amount to the credit card in one go. These plans will also allow you to control your credit limit as the whole transaction amount is charged to the card at the time of sale, but is released as and when you make a payment. For illustration, if you make a purchase of S$4,000 in December, 2016, on a card with a credit limit of S$8,000, your credit limit will go down to S$4,000. But if you turn it into an instalment payment plan, if you make a monthly payment of S$400 towards it, the credit limit will increase by the same amount until it is restored completely. (All this is on the assumption that you are not buying anything else with the card in the interim.)
If you know that you are going to make big purchases in the next few months – you or a sibling are getting married, or you’re going abroad on a holiday – then you should check with your bank and see if you can get your credit limit raised for a short term. This will help you keep your expenses below your credit limit, and thus avoid over-limit fees and a negative impact on your credit score.
This should be your absolute last resort, as credit card cash withdrawals are very costly. Apart from a high interest rate – at least 2%-3% more than your credit card interest rate – this transaction also comes with a cash advance fee of around 5% to 6% of the withdrawn amount. If your cash need is high, go for a personal loan instead, as the interest rates on personal loans are lower than those on cash withdrawals and credit cards.
It is important to be aware of your financial products and make smart decisions rather than repent your ignorance later on. We hope these tips will help you find the most suitable credit card and pan out your expenses wisely.