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If you don’t have a high level of discipline when it comes to credit card repayment, you could find yourself in financial trouble. Due to these concerns, we take a look at the advantages of using credit cards along with how they could wind up as potential pitfalls. We also walk you through how to develop the discipline you need to prevent yourself from falling into excessive debt.
Using a credit card for your day-to-day transactions allows you to earn rewards. There are 2 main types of credit cards, those that offer cash back or rewards points. The first type gives you cash in return for a certain level of spending, which you can then apply when paying your credit card bill.
The second provides rewards points that you can use to redeem anything from your credit card company’s catalogue. Rewards type credit cards can also come in more specific variations like store-linked credit cards (NTUC, Robinson’s) and cards that collect flight miles.
On the flip side, having a credit card gives you more purchasing power and may give you the illusion that you have more money than you actually do. It’s easy to forget that every time you use your card, you’re actually taking out a small yet high-interest loan from the bank. Overspending on your credit card actually borrows against your future income, since you’re spending money that you don’t have yet.
Mindfulness is the practice of being aware of your actions in the present moment without judgment. A lot of the time, you may find yourself swiping your credit card without really thinking about whether you’re spending within your means.
Bringing awareness to your spending habits by asking yourself questions about whether you need something or if you’re just buying it for momentary gratification. Finally, check that your budget is able to accommodate it. Doing so can help you manage the constant temptation, and stop you from making impulse purchases or splurging on non-essential items.
Using a credit card when making a big purchase allows you to pay in instalments, which are sometimes offered without interest by your financial institution (FI). Doing so can provide you access to an item that you may have trouble getting if you had to pay for it in full. Even if you could afford to pay in a lump sum, using an instalment facility can increase your cash flow and lets you channel your funds into other needs.
Using an instalment plan can give you the false sense of security as the repayments seem manageable. Sometimes, you may even forget to pay your bill due to your various financial commitments.
Defaulting on your repayments or only paying the minimum sum can result in having to pay very high interest of around 25% per year. Continuing to maintain a large balance will snowball the amount you owe your card company very quickly and can lead to a debt problem you can’t pull yourself out from.
All big-ticket purchases should be budgeted for in advance. If you have more than one big-ticket purchase, you should check that you’re able to manage concurrent monthly repayment plans. If you foresee yourself having insufficient funds to fully pay off your monthly commitments, consider delaying the big-ticket purchase until your cash flow improves.
FIs usually judge your credit-worthiness by looking at a credit report. A good credit repayment history and the resulting score will make it easier for you to obtain credit and qualify for larger loans. Having a credit card and making your payments on time is the easiest way to build a respectable credit standing, and will come in handy when you need to apply for a housing or car loan in the future.
As much as they can help build a good credit history, credit cards can also plummet your score if you miss repayments or hold a high amount of debt in relation to your income. A low credit score will disqualify you from many loans, or put you in a position where only unfavourable loan terms are available.
To maintain your credit standing, you can purchase a copy of your credit report online from Credit Bureau Singapore. If you have recently applied for a credit card with a member bank, you’re entitled to a free credit report and can request for one via CBS as well.
Keeping track of your credit score lets you know what lines of credit you might qualify for, and what types of changes you may have to make to improve it.
From the points above, it’s clear that credit cards are neither good nor bad – it depends on how you choose to use them. To take full advantage of all the perks that credit cards can offer, responsible spending is essential. With proper planning and conscious self-discipline, you’ll be able to reap all the rewards that credit cards can offer.