The Monetary Authority of Singapore has reported that more than 60% of the cardholders on the island pay their full outstanding balance every month suggesting that usually Singaporeans are disciplined when it comes to using their Credit Cards and that many Singaporeans use their credit cards to earn rebates and rewards. Making only the minimum payment due on your credit card statement remains one of the biggest blunders because a minimum payment implies that at least a sum of the total due needs to be paid in order to avoid the late payment fee over and above your credit card outstanding balance.
Making a minimum payment each month is rather very tempting because you are under the assumption that you can save the rest of the payment money and utilize it for various other purposes and push the rest of the balance over to the next month. The truth of the matter is that you may not feel your debt increase on a day to day basis but when you look at the larger picture, your debt has been rapidly increasing without your knowledge. Many in Singapore continue to fall prey to this trap and by the time they realize their mistake, their debt has grown beyond their imagination.
The following are the reasons why making only the minimum payment due each month is highly dangerous –
Usually, the interest rates on Credit Cards are 20% or higher and this is subject to compounding each time you only pay the minimum amount due. Whenever you pay off the minimum amount due, the payment will first be used to pay off the interest before the outstanding balance. Your outstanding balance will continue to pile on along with the compounding interest which will ultimately take you years to pay off your credit card bill. At this point, you may realize that the compounded interest alone is almost half of the original outstanding bill of your credit card. By avoiding the complete payment each month, you end up paying a much higher amount in the end assuming that you have been saving all the while by channeling the rest of the payment amount towards varied other purposes.
When you continue making the payments only for the minimum amount due, you may still want to continue using your credit card. But what you do not realize is that you are further piling on to your credit card bill because you only make the minimum payments each month but continue using your credit card for future purchases. This will only result in your outstanding debt ballooning up because it will now comprise of the following components – Previous Purchases + Interest Rate + Compounded Interest Rate for making the minimum payment due + Future Purchases. You will ultimately end up maxing out your credit card because your spending will lead to reaching your credit limit in no time. Therefore the continuing use of your Credit Card will not be sustainable in the long run. Before you make any purchases, you must remember to use your credit card only for purchases your bank account can afford. If your purchases go beyond what you can afford, you will need to come up with a better payment plan or a budget to accommodate such purchases into your income. A good way to avoid reaching your credit limit is to contact the bank and request them to lower the credit limit on your credit card to an amount under your salary level to ensure that you do not borrow beyond what you can afford to repay.
You do not need to pay the complete outstanding amount if that is not feasible to you, but at the same time, making only the minimum payment due is not a healthy habit either. You could pay off a little more than the minimum amount due each month. This will help you bring your compounded interest rate to a lesser value and at the same time you can rid yourself of the debt sooner as well. You can start by making a minimum payment plus a fixed amount per month and then start increasing the value of this fixed amount gradually to continue decreasing the compound interest rate. However, if you have multiple credit cards and you use all the money you have to pay off the debt of all the other credit card bills, then it makes sense to make the minimum payments in order to avoid the late payment fee. However, this behavior is much more harmful and your debt will catch up with you soon enough and with much more adversity the longer you put off making the complete outstanding bill.
Your debt level constitutes approximately 30% of your credit score. The amount of debt you have compared to your credit limit is called credit utilization. A high credit utilization implies that you are close to reaching the credit limit on your credit card and this will therefore reduce your credit score further. Hence, it is advisable to keep your credit card balance at 30% of your credit limit or even lesser in order to maintain a good credit score.
Your payment history contributes to more than 30% of your credit score. One of the most important things any future lender will concern themselves with is your ability to repay the debt you incur from them and they will evaluate that on the basis of whether or not you have been paying your bills on time. Minimum payments is just the stepping stone to making late payments in the future that will adversely affect your credit score.
Always try to pay the complete outstanding amount instead of settling to pay the minimum amount each month or try to pay more than the minimum amount to decrease the value of the compounded interest rate. In case you are facing a lot of issues or due to unforeseen challenges in life you are unable to make complete payments, you can immediately contact the bank and make them aware of the situation. There are instances where the bank can help renegotiate the terms of your payments by lowering the interest rate for example. They can further help restructure your total debt too. As an alternative, you could also contact Credit Counseling Singapore or such organizations in order to manage your debt better.