Give them some credit
It’s common to hear horror stories about credit cards in Singapore.
Basic financial prudence teaches that we should avoid loans and debt, and many think those are synonymous with credit cards. But in reality, most cardholders don’t create debt with their cards.
Here are some of the most popular credit card myths we Singaporeans believe in, and the facts to set it straight.
Fact: Credit cards don’t charge interest if you make full repayments
Credit cards have an interest rate of about 2% per month. However, if you make the full repayment, there is no interest levied. Last year, only one in five Singaporean credit card holders had rollover debt (did not pay in full.)
If you cannot make full repayment, you can use a balance transfer facility. This is when you transfer the debt onto another credit card and are charged 0% interest for a given period (often six months). This gives you time to gradually pay off the full amount without incurring interest.
NEXT: Credit cards will ruin your credit score →
Fact: Credit cards can actually improve your credit score
If you pay back your credit card on time, you can get the much-desired AA rating on your credit report. This will help you to secure critical financial loans later, such as your home loan or car loan.
If you never use any loans, your credit score will be rated as Cx. This means there is no record of how reliable you are when it comes to borrowing.
Banks are more comfortable with an AA rating than a Cx rating, as they would rather have proof of your responsibility.
Even if you don’t make full repayments (which we don’t encourage, please pay in full whenever possible), your credit score will remain intact if you pay the minimum amount.
NEXT: You can’t save money with credit cards →
Fact: You CAN save money with the right credit card
If you use credit cards purely as a mode of payment and you pay them back in full every time, you will save money on your transactions as credit cards often come with special offers, such as discounts and vouchers.
Credit cards also give rewards in the form of cashbacks, as well as points and air miles, which can be exchanged for freebies like airline seat upgrades, or storewide vouchers.
NEXT: Credit cards encourage you to spend beyond your means →
Fact: You can lower your credit card limit to control spending
A simple way to control your spending is to limit your credit to less than your monthly income. This ensures that no matter how much you spend on the card, you are assured of being able to pay it back.
If you couple mindful spending with meticulously tracking your transactions, using a credit card can even double as a budgeting aid.
NEXT: You can lose your home if you can’t pay your bill →
Fact: Credit cards are unsecured loans and don’t require collateral
Most credit card holders never get to the point of default (this is when the bank writes off a debt as an unrecoverable loss).
But even in the improbable situation that it happens, a credit card gives you unsecured loans.
Unlike a home loan or car loan (these are secured loans), there is no collateral involved. You do not have to pledge your home, car, or other assets to back your credit card debt.
NEXT: Credit card interest rates will put you in never-ending debt →
By Ryan Ong, SingSaver, July 2016
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