So you got your first credit card – good for you! But before you get excited and start swiping for every purchase, get your facts right.
Careless or irresponsible use of credit cards can result in problems that will affect your financial health. When using your credit cards, make sure to look out for these 14 mistakes.
Text: Alevin Chan
The post 14 Credit Card Mistakes You Didn’t Know You’re Making appeared first on the SingSaver Blog. SingSaver.com.sg provides free, quick and easily accessible resources to help you understand the different financial products in Singapore. With SingSaver.com.sg, you can make the most informed decisions about applying for a product that matches your needs.
The most commonly known fact about credit cards is that they carry high interest. What’s less commonly known are the late payment fees you’ll get charged if you fail to make a payment by the due date. This charge now hovers around S$80, and is charged per incident per card. You can imagine how missing a payment or two can quickly ruin your budget for the month. Also, some credit cards raise their interest rate if you continually miss payments, and the increased rate persist until you manage to get your account back in good standing for a specified period. This increased interest will apply on whatever amount you owe, including late fees, which means you’re fined on top of your fine. Don’t give away free money; pay your credit card bills on time, every time.
Your credit card statement will helpfully stipulate a minimum sum to be paid, but we suggest that you ignore that number, lest you be tempted to pay a lesser amount towards your balance. Being influenced by the minimum sum just because it’s stated there may sound ridiculous and weak-willed, but it’s actually a widely studied cognitive bias known as “anchoring”. And why is paying the minimum sum so bad? You guessed it; compounding interest. Every dollar you owe on your credit card will turn into a springtime jackrabbit, multiplying until you find yourself drowning. Unlike actual fluffy bunnies, this is a tide of regret and tears you don’t want to get caught in.
Although your credit card comes with a Cash Advance facility, you should strive never to make use of it. This is because a) you’ll be using money you don’t actually have, b) you’ll need to pay money for the privilege of using money you don’t actually have, and c) you’ll be paying a higher interest rate. The only possible reason you should ever use a Cash Advance is if you’re caught in an emergency while overseas. And even then you should only withdraw what you need to get you safely back home. And you should pay back the amount withdrawn as soon as you can. The bottom line is: a credit card is not an ATM card. Never treat it as one.
It has become an accepted practice for credit card users to waive their annual fees. Granted, there’s no sense paying money for a card that you hardly or never use, but not paying your annual fee may not be the best option every time. Some air miles credit cards give you miles when you pay your annual fee. In the case of the DBS Altitude Visa Card, you’ll be getting 10,000 miles for paying S$192.60, which equals an earn rate of approximately 52 miles per S$1 spent. In this case, paying your annual fees also buys you the cheapest batch of air miles ever. Before you decide to ask for a waiver, find out what rewards you could get for paying it instead.
Virtually every credit card out there will enrol you into a reward programme of sorts, but the great tragedy is, most of us don’t make use the full use of the rewards we earn, if at all. Perhaps we don’t bother redeeming our rewards points because we aren’t too happy with what’s on offer. If you’re going to use your credit card, you might as well reap some benefits from it. You’re just passing up ‘free money’ otherwise. Granted, there are terms and conditions on your rewards, so it’s worth the effort finding a card that suits your lifestyle. That way, you’ll never miss out on your rewards points again.
If you’ve ever felt comfortable putting a large purchase on your credit card, even though you currently don’t have the funds for it, you’re making this very basic but dangerous mistake. Credit cards come with limits that are typically 4 times of your monthly salary. With minimum monthly payment as low as S$50, or 3% of your outstanding balance, you may be lulled into spending beyond your means. To avoid this mistake, always work out how much you can spend on your card before getting into debt. Ignore the credit card limit in favour of how much you can afford to pay in the next billing cycle.
Your credit card may allow you to pay for your purchases using an installment plan, such as American Express’s Pay Small, but that doesn’t mean you should max out your credit card this way. For one, most rewards points and rebates aren’t awarded on instalment purchases, so you’ll be missing out on a whole lot of value. For another, any missed instalment payments will be charged the prevailing rate. Thirdly, you credit limit will be reduced by the entire amount of your purchase, increasing your chances of incurring overdraft fees. When using your credit card instalment plan, always make sure you are able to keep up with the monthly instalment payment, and prioritise your purchases to keep your cash flow healthy.
Some credit cards come with complimentary travel insurance that provide a payout in case of injuries or illnesses suffered while overseas. Some credit card travel insurance also provide compensation in case of delayed or lost luggage, or flight delays. To enjoy the complimentary coverage, all you have to do is to charge your tickets or travel package to an eligible credit card. And just because it’s complimentary doesn’t mean it’s inferior: credit cards provide coverage of up to S$1 million per person for accidents, and up to S$4,000 for inconveniences such as lost luggage. And did we mention that you won’t even have to go through a medical questionnaire? Free,
With new credit cards getting pumped out every now and then, it’s likely you’ll be switching cards as you come across new offers and features. Do that a few times and you’ll soon have a tidy stack of credit cards sitting in a drawer somewhere. Because credit cards remain active until cancelled, unused credit cards will continue to attract charges, such as annual fees. If you have a habit of ignoring your mail, you could inadvertently rack up unpaid annual fees, late charges, and interest payments on top of it all. To avoid this expensive scenario (credit card annual fees go up to several hundred dollars), go through your credit cards and cancel any that you no longer use. Do this at least once a year.
Supplementary credit cards provide a useful way to manage your family budget and maximise the rebates you can earn – you will be awarded cashback or air miles on eligible transactions charged to supplementary cards. However, not setting a limit on your supplementary credit cards could result in a larger-than-expected statement balance, throwing off your budget for the month. Your credit limit may also be used up, forcing you to incur overdraft fees to meet essential payments. Help your family members or close ones ensure they don’t overspend by setting a credit limit on their supplementary cards. This way, they can still access credit if needed, but won’t inadvertently cause a crisis.
Credit cards are constantly evolving to keep up with changing consumer needs, which means that there’s likely a credit card that will better serve your needs. For example, the recently re-launched OCBC Titanium Rewards Credit Card gives 10X points for purchases of electronic devices and gadgets, making it the best credit card for this shopping category – for now. To help keep up with all the new offerings, use a free comparison site like SingSaver.com.sg to help you compare the best credit cards. Not only can you easily and quickly find the most suitable credit card, you could also benefit from exclusive giveaways you may otherwise miss.
When an emergency crops up, you may be tempted to reach for your credit cards. But doing so could sow the seeds of a financial emergency sometime down the road. Credit cards may offer a convenient source of funds, but as they are unsecured facilities (you don’t have to pledge any collaterals), banks charge high interest rates. As you are likely to need time to pay back the amount your emergency cost, you’ll be incurring interest from the moment your credit card account becomes due. The compounding interest from your credit card debt could weaken your financial position for a long time, which would make it more difficult for you to cope should another emergency occur. To stop this from happening, build and keep an emergency fund.
Free travel insurance isn’t the only thing your credit card provides. Some credit cards come bundled with free airport lounge access, very handy for making sure your holiday gets off on the right note. Airport lounges are special, restricted areas that offer a selection of amenities geared towards the tired traveller. You can have a meal or a drink, take a nap, have a shower or bath, enjoy fine cigars, even have a spa treatment. Credit card complimentary lounge passes expire on a fixed schedule, so why let them go to waste?
If you find yourself racking up credit card debt, stopping your credit card usage and making a plan to pay off your rollover balances is a good first step. However, the difficulty in paying off credit card debt lies in the high interest rates, which compound monthly. The less you pay each month, the longer you will take to pay off your debt. Which means to say you will be paying a ridiculous amount in interest by the end. To help you pay off your credit cards, try lowering your interest rates using a balance transfer or a personal loan. If your debts are large enough – over 12 times your monthly salary – try applying for a debt consolidation plan to manage your debt.