Credit Card

Why should you own at least a credit card in your adult life

You might heard news of people credit card debts pilling up resulting in risk of bankruptcy. So what is this evil residing in credit card? How can you turn this evil to your advantage? Read on to find out more :)

Credit card terms

Credit card allows you to make a purchase and pay at a later date.
Below are some of terms of credit card you should take note of:

Statement Date	Is the date when you are billed for all your spending for the month. Depending on your bank credit card, the statement date could be end of the month or every 7th on every month.
Due Date (Interest Free Period)	Due date is normally the latest day you should pay your credit card bill after receiving your monthly statement. You normally have around 20 to 25 days of interest free period to pay your credit card bill. E.g. (If your statement date is 7th every month & the bank give 20 interest free period, you will have up to 27th every month to pay your credit card bill.
Late Payment Charges	If minimum monthly payment or full amount due is not made by Due Date, a minimum of around $80 to $100 per month late charges will be incurred. If you don’t want to incur hefty $100 late payment charges, please be reminded to pay your bills on time or at least the minimum monthly payment if you are short of cash. (Tips: normally bank will waive your late payment charges if you call up and it happened to be your 1st time)
Annual Membership Fee	Bank will normally charge an annual fee between $100 to $300 for owning their card. However, good news is that normally 1st year annual fee is waived to attract you to use their card. If you are a good spender, banks might even waive you off annual fee for the 2nd year.
Minimum Monthly Payment (Roots of all Evil)	Normally 3% to 5% of the monthly balance outstanding, plus any outstanding or $50, whichever is greater. Credit card will give you the option to pay a portion of your spending instead of the full amount. E.g. (you are billed $1,000, but you can choose to pay $50 instead and your bill is counted as settled for that month. But what happens to the remaining $950? Read on to find out more about this ‘Evil’
Interest on Outstanding Balances (The Evil)	Applied rate – Around 2% to 2.5% per month Effective interest rate – Around 25% to 30% per annum If payment is not made in full by the Due Date, interest will be calculated daily on the outstanding balance from the previous Statement Date and on all new transactions from the date they are posted to Card Account. No interest will be levied if payment is received in full by the Due Date and there is no balance carried forward from the previous statement. Now you know how banks make money from consumers like us. If you choose to pay only the minimum monthly payment instead of the full amount due, bank will charge you interest on your outstanding balances. Although 2% (The small evil) might be considered small, if you allow it to roll over for a year, it will be a huge 30% interest (The Evil) cost to you

*Credit card terms might varies across banks, but highly similar to the above table

'Evil' & the 'Good'

Let us evaluate the 'Evil' and how can it be negated & eventually utilising the 'Good' in details.

Evil:

• High interest cost on your outstanding balances-As shown on the above table, if you choose to pay only the minimum payment on your credit card bill, you will incurred a hefty interest up to 30% p.a. (Can be negated if you choose to pay full amount due instead of the minimum payment on due date)
• Late payment charges-You will incurred around $80 to $100 charge if you fail to pay your credit card bill on due date. (Can be negated if you set a calendar reminder to make bill payment before due date)

Good:

• Free interest period - Until you received your credit card bill, you will have 20-25 days to pay your credit card bill, meaning you get to earn interest in your bank account till you make payment on due date. (Especially useful if you have make a big purchase)
• Rewards - Credit card rewards customer with cash rebates, air miles or points when they spend with their credit card which indirectly subsidizing your cost of purchase. (e.g. a 1.5%  cash rebate on a $1,000 purchase will reduce your cost by $15)
• Expense tracking - With internet banking, you can easily check what you have spend on conveniently and to manage your cash flow and budgeting more efficiently. (You can easily download data of your spending into excel and evaluate from there as compared to using cash which you have to manually record your expenses.)
• Sign up promotion & 1st year fee waiver- With banks competing to attract customers, most banks will waive off the 1st year membership fee on your credit card and offer one time promotion of cash credit of around $100 to $200 or gift like luggage when you sign up for a credit card.

As you can see, the 'Evil' can be easily negated which you can enjoy the 'Good' in credit card. In the below case study, we shall evaluate further.

Case Study

'Evil'

An individual can own multiple credit cards from various banks.

Bob own 2 credit cards from different banks, each card has a $10,000 credit limit. Bob like to spend and only pay the minimum monthly payment on due date. Over a period of time, Bob eventually max out his 2 credit card spending limit which prevented him into spending more. To continue his extravagant spending habits, Bob sign up another 5 credit cards with other banks. Over a period of time, Bob found out he has max out his 5 new credit card limit and has difficulty in paying the minimum monthly payment for all his 7 credit cards. Eventually, Bob found himself in a $70,000 credit card debt with a hefty 30% interest p.a.

What went wrong?

• Bob only pay the minimum monthly payment on due date instead of the full amount due.
• Bob went on to sign up for another 5 credit cards to spend despite inability to pay up fully for his current 2 credit card.
• Due to Bob poor spending habits, he accumulated $70,000 credit card debt with a hefty 30% interest p.a. facing the risk of bankruptcy.

'Good' 

Tom own a credit card from a bank, the bank has granted him a $12,000 credit limit. His credit card offer him a 1.5% cash rebate on all his spending. Tom has an average card spending on $1,000 every month. He always ensure he pay the full amount due on due date. On one occasion, Tom decided to treat his family to a vacation costing $10,000 which he charge to his card. Throughout the 1 year, he has received a total of $330 cash rebate via his credit card.

What went right?

• Tom always pay the full amount due every month to avoid the high interest cost on his outstanding balances
• Using his credit card effectively, Tom managed to enjoy $330 of cash savings in a year.  ($1,000 x 12 + $10,000) x 1.5%
• Instead of using cash or debit card on his $10,000 travel expense, Tom managed to earn around additional 1 month of interest in his bank account as credit card has a Free interest period

Conclusion

You have seen how effectively can a credit card be used and to how avoid the 'evil' trap. Do consider getting a credit card if you have been working for quite some time and considered yourself as a discipline spender. If you tend to overspend, is better not owning a credit card.

Below are some of the tips for using credit card effectively:

• Always pay the full amount due instead of the minimum amount due
• At any point of time you cannot pay the full amount due, immediately stop spending on your credit card
• Always pay on the due date to enjoy the 20-25 days interest free period
• As there are lots of credit card in the market, it is important to choose the right credit card which matches your spending habit

There are a lot of websites recommending various credit card, do research and select a suitable card that matches your spending habit. Lastly, stay discipline and enjoy the benefits of credit card.

Last updated May 2020