We’re sure you’ve seen (and avoided) your fair share of the people manning credit card booths in shopping malls, hounding passers-by with why you should sign up for this or that credit card. How do you really feel about this tiny piece of plastic, though?
There are those who avoid credit cards completely because of myths that are in serious need of debunking and that’s why we’re here. Here’re the top Singaporean credit card myths and facts that may sway you into signing up for one.
1. Just make the minimum payment
This is a dangerous myth because it could ruin your credit score. Most credit card providers have a minimum payment amount each month and this ranges between 1-5% of the outstanding balance or a fixed amount like $50, whichever is higher. For new credit card holders, this may be a little confusing because they may think that they only owe the lower amount every month.
The most important thing is to be aware of your credit card’s annual interest rate. This varies between providers but it’s usually around 26-28% (or more).
For example, if you charge $5,000 to your credit card with a 28% annual interest which you don’t pay off immediately, and decide to pay it off within 12 months or less, you actually owe:
$5,000 × 1.28 (annual interest rate) = $6,400
You owe $1,400 of interest on top of the initial $5,000 charged!
If you pay off the balance within a year:
$6,400 ÷ 12 months = $533.33
Thus, you’ll have to pay $533.33 every month to pay off the balance within 12 months. However, the minimum repayment is usually lower than that and could put you in a world of debt which could lead to a ruined credit score or worse, bankruptcy. Also, remember that interest accumulates every month so it’s best to pay off the outstanding balance as soon as you can.
See more: How many credit cards should I have?
2. Credit cards will bankrupt you
This is a common myth which is often heard because of the sensational stories about people owing millions on several credit cards. Credit cards can be a useful tool as long as you use them correctly.
Credit card interest rates are usually around 2% per month and this is only applied to the outstanding balance at the end of your billing cycle.
If you make a payment on a credit card, you usually have around 27 days to make the full repayment depending on the provider. Paying off the charge makes your outstanding balance $0 and 2% interest on that is still $0.
For those who may be struggling to pay off their credit card debt, look into balance transfers. This would transfer your credit card balance to another account with the same provider whereby your debt would be broken down into a repayment period of six to 12 months with a minimum repayment amount (much like with credit cards) and 0% interest.
3. It will mess up your credit score
Some people are misinformed and believe that using a credit card would lower your credit score because you’re ‘in debt’. This is perfectly untrue because your credit score measures your ability to pay off any borrowed money. The score reflects the likelihood of a person to repay their debts.
Someone who has never used a credit card or other credit facility would have no record of their repayment behaviour thus, scoring a Cx. Banks prefer credit card applicants with a BB rating compared to a Cx rating as this shows that the applicant is a responsible borrower.
Paying your credit card bills on time every month would give you the very in-demand AA rating which could help when you need to apply for a financial loan (home or car loan) in the future.
See more: Maintain or better yet, improve your credit score? Here's how.
4. Credit cards encourage irresponsible spending
It is more convenient spending on a credit card because you don’t physically see the money leaving your bank account. People who use their credit cards to spend beyond their means don’t look at the purchase amount but rather on the item or experience they bought.
Finding the right credit card is a lot like marrying the right person. That’s a small exaggeration but much like your life partner, signing up for the right credit card would make your life much easier and most importantly, happier.
The right credit card can help you save money because a lot of them have special discounts and offers at shops, restaurants and online as well. There are also cardholder rewards points which can be exchanged for vouchers or in sweet air miles which can translate to business class upgrades or even free flight tickets.
Cards which offer cashback are also great because you’ll be credited back a small percentage of your monthly spend which varies between 5-8%. The only thing is that these cards would require a minimum spend on specific categories like groceries, petrol and others.
As always, there are pros and cons to owning a credit card. Rather than thinking of it as the enemy, credit cards could help in bumping up your credit score while you reap rewards like cashback and discounts at retail shops. The most important thing is paying off what you’ve charged to your credit card by the end of every billing cycle and you’re good.