Almost everyone has a credit card today because they’re incredibly convenient, but that doesn’t mean you can abuse your card in the long run. Financial specialists worldwide warn people about the dangers of relying exclusively on your credit card.
One of the most significant dangers is the snowballing interest rates.
If you’re not careful, your overdue balance can easily escape your control. That can happen when you’re not planning your budget carefully, and instead of repaying your credit card fully each month, you’re using that money for other purchases.
But the more you prolong your “tenure,” the more money you’ll have to give back.
So, if you want to avoid sinking into debt too much, read this guide below. We’ll analyse all the fees you can expect and help you foresee the usual traps associated with irresponsible credit card use.
Table of Contents
How Does A Credit Card Work?
Credit cards aren’t magical pieces of plastic that make money instantly appear in your wallet. Your credit card is much like a loan officer that lets you borrow a specific amount of money based on your financial status.
Thus, the outstanding balance on your credit card signifies the amount you owe. If you don’t pay this balance when the due date comes around, the bank will add interest.
And that’s a problem.
Many Singaporeans prefer to pay just the minimum sum to keep their credit cards going. Thus, each month they borrow more money and the existing debt plus accumulating interest rolls over into the next month.
Here’s the first trap:
Your credit card may resemble a loan-officer-genie that’s always in your pocket; instead, it’s an inanimate object, so it can’t directly hold you accountable.
You bear all the responsibility associated with understanding how credit cards work. So, remember that each time you’re using that piece of plastic, you’re taking a loan that comes with steep interest if you don’t reimburse it fully.
Instead, it might be more affordable to get a fixed loan for your financial needs.
Credit Card Interest Rates (The Nitty-gritty)
The interest for your credit card is a whopping 0% if you manage to repay your entire debt before that balance is due. And that brings us to the second trap:
Thinking there’s always time.
So, let’s say you need $1,000 for some emergency repairs or for some new clothes. If you don’t have that money in your savings account, the temptation is to just complete your purchase with your credit card. After all, it only takes a swipe, right?
At this point, you probably think there’s plenty of time to save that money you withdrew within the next month.
No one honestly wishes to defer their credit card debt month after month.
And that’s the trap we mentioned above: people think they have time to save the money they got on their credit cards.
Here’s how to ascertain that:
Firstly, never make an impulsive purchase with your credit card.
If your purchase can wait until you save enough money for it, do that.
If it can’t wait and it’s a considerable sum, consider another alternative like getting an actual loan. This loan is easier to repay because you have more comfortable installments spread over a longer tenure. As such, you can easily afford to make those payments at their respective due dates.
Decide to use your credit card only if you’re confident you can save that amount you’ve borrowed within the month.
Plan your budget to ensure you can save that money – and stick to your plan. For example, if you withdraw $1,000, you have to save $33 / day to pay your credit card balance.
Instead, here’s what most people do:
They withdraw $1,000 from their credit cards.
They check the interest rate and see it’s only 2%.
They figure $20 isn’t a lot.
They defer their loan for another month.
In the meantime, they withdraw another $1,000 for something they don’t genuinely need.
They use the same reasoning to rationalise not reimbursing their debt fully.
They continue this spiral until their debt is too challenging to control.
Warning: Each day of not reimbursing this credit card loan brings more interest on the outstanding sum. If you’re not paying that interest until the following term, your balance will incur even more interest. That interest also applies to the new things you’re purchasing until you’ve settled your bill.
Thus, anything you don’t pay rolls over month by month, accumulating increased interest so that your debt snowballs into oblivion.
Wait, what about 0% interest rate cards?
Credit card interest rates can be 0% if you manage to pay on time.
This point refers to specific deals on credit cards where you get 0% interest for a particular period, most likely 6-12 months. During this time, you can make any purchase you want without having to worry about interest.
Let’s be honest here:
Absolution from guilt is an excellent hook.
And it’s also a neat trap – the third so far.
A 0% interest for a more extended period also comes with a sense of no-strings attached. Thus, you can be tempted to buy more than you need just for the heck of it.
Alternatively, you may use this sort of credit card to consolidate other loans. Remember to pay your loans while you don’t have to worry about extra interest if you’re doing that. Otherwise, you’re going to wake up with too much on your plate without even realising it.
Credit Card Interest Snowballing Example
If you’re still not convinced that you should repay your credit card balance in full each month, look at the example below.
Tl;dr: If you withdraw a mere $5,000 using your credit card, you need 14 1/2 years to pay that off, making just minimum repayments.
Your bill is $5,000.
The minimum repayment is $50/ month.
The interest rate is 25%/ year.
You need 175 months to repay that debt with just $50/ month. That’s 14.5 years.
The total sum you end up paying at the end of this period is $13,500.
Remember: That minimum payment you’re making to keep your plastic genie alive goes towards your interest rate first. Only what remains after paying the interest rate covers the actual balance – and that’s why it takes so much time to pay that $5,000 balance.
Warning: If you don’t pay even the minimum required amount, you’ll suffer various penalties, such as:
You become ineligible for unsecured credit facilities.
The bank will suspend all credit lines that you’re late paying.
Your credit rating will plummet, and that affects your trustworthiness as a financial customer for years to come. As a result, it won’t be easy to apply for financial assistance such as an HDB or car loan.
Other Credit Card Fees
The interest rate isn’t the only charge you have to worry about after getting your credit card. Other costs include:
Late payment fee. If you don’t pay the minimum required amount before the precise due date, the bank will charge a late penalty fee. This fee is usually $100 flat, irrespective of how much you have to pay. So people with $100k overdue balances pay as much in penalty as people with $30 credits. And, of course, that $100 penalty adds to your debt and attracts an increased interest.
Annual fee. This charge represents the subscription you’re paying for your credit card.
Card replacement fee. This charge isn’t mandatory; you’re only going to pay it if you lose your credit card and want a new one.
Cash advance/ withdrawal fee. If you want to withdraw more than your limit, your balance will incur another fee that attracts more interest.
International transaction fees. The rules about doing business with businesses abroad include other charges:
Exchange rate charges for converting all foreign monies to Singapore dollars. You have to check the terms and conditions on your credit card’s contract to see how that conversion is calculated and what other fees you can expect.
International transaction fee from the card companyto the credit card issuer. Basically, Mastercard or Visa charges your bank, and the bank charges you if you’re paying a foreign merchant in their currency.
If you’re making transactions abroad in SGD, you’ll need to pay an exchange rate according to that vendor’s rules. So, it’s wiser to assess those rates carefully. You may also incur an international transaction fee from the card company.
Being Mindful Of Credit Card Interest Rates & Charges
Of course, it is not to say that credit cards are totally bad. It is helpful with their rebates and points, especially if you’re planning to have a wedding or buy a car.
Credit cards come with attractive deals, like no interest for a specific period or what’s advertised as a minimal interest of just around 2% per month. However, we’ve proven that even a small $5,000 loan can take you 15 years to repay.
The solution is to be responsible:
Read the fine print carefully.
Borrow only what you can repay.
Make a reimbursement plan and follow it to the letter.
Alternatively, for fash cash within hours, you can consider a trustworthy financial institution like CreditMaster.
We have been operating in Singapore for several years and we offer low interest loans with fixed monthly installments. The best part is that we can disburse you the money within an hour should all be approved. It is a lot more affordable and stable.
This is a better solution than drowning in credit card debt.
At CreditMaster, we believe in building long-term relationships with our clients. Our team of experienced professionals is always ready to provide personalised financial advice and assistance to ensure that our clients make informed decisions. We understand that each client's situation is unique, and we strive to tailor our services to meet their specific needs.
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