Rolling over credit card debt is no game

Rolling over credit card debt is no game

NAV TL;DR

If you don't have time to read through the whole article, you can check out our short version below:

  • Credit cards are convenient, but be careful of racking up high interest charges
  • Credit cards offer an interest-free period of about 20 to 25 days from your date of spend. Think of credit card expenses as money borrowed from the future that needs to be paid on time and in full. Otherwise, interest charges will apply.
  • Avoid rolling over balances. Aim to pay in full every month or curb your spending.
  • Credit limits do not reset like a mobile data plan. You must repay every last dollar, with interest.

Credit cards. An ubiquitous part of our lives, and still relevant (in Singapore, at least), even in the age of e-wallets and other modes of digital payments.

Indeed, those shiny, sometimes colourful pieces of plastic offer rebates, rewards or miles on top of completing your payment. The speed of a swipe, the ease of payments, and the prestige of flashing certain "platinum" or "titanium" cards are among their main attractions.

But before you go happily charging to your card, get to know the different terms and implications that come with it.

Understanding credit card terminology

Total credit limit
Determined by the credit card issuer, typically 4 times your monthly salary. If you hold multiple credit cards with this issuer, your credit limit is shared across all cards.

Total available credit limit
This refers to your total credit limit minus what you owe (your outstanding credit card balances, including instalment payments to be made). It will be restored after you repay in full.

Minimum payment and Payment due date
The minimum payment sum must be paid by the payment due date, otherwise a late payment fee will be charged.

Sub-total
This is the total amount of the current month's transactions.

Total
If payment was not made in full the previous month(s), the previous balance(s) will be added to the Sub-total and reflected here.

Pay off every dollar on time, every time

Credit cards offer an interest-free period of about 20 to 25 days from your date of spend. Think of it as money borrowed from the future"”that needs to be paid on time and in full.

Not doing so may result in dire consequences, including:

Incurring substantial charges, which may affect your cash flow for months or even years
If the minimum payment is not received by the payment due date, a late payment fee"”typically at least S$100"”will be imposed.

Further, if the payment is not made in full, interest charges will kick in. These generally range between 26% per annum (p.a.) and 28% p.a. The interest is calculated on a daily basis, which means the amount you owe is compounding with interest daily. Simply put, the longer you defer or roll over your outstanding debt, the more interest you will accumulate.

Example:

Your credit limit: $5,000
Monthly credit card expenditures: $500
Minimum payment required: 3% of outstanding balance or $50,whichever is higher
Interest rate: 27% p.a.

What happens when you pay only the minimum amount each month?

  1. You will hit your credit limit in about 1 year.

  2. Then you can no longer spend on your credit card, but start paying down the balance. At this point, your minimum payment every month would have jumped from $50 to $150.

It will take you 197 months (16.4 years!) to clear that one year of spending. And you will end up paying $15,473 for that $5,000 spend!

Having to pay the credit card bill for more than 16 years"”longer than any car loan!"”can strain your monthly financial resources, leaving less cash on hand for other expenses.

Not paying your credit card bills on time, at all, or in full will affect your ability to secure another loan and the amount you can get. This can come as a rude shock to young couples trying to apply for a home loan, when they discover the amount they are eligible to borrow is limited due to their past credit repayment behaviour.

In extreme situations, if the amount of debt exceeds S$15,000 bankruptcy proceedings may be initiated.

5 Pro-tips to help you better manage your credit card debt

  1. Avoid rolling over balances. Aim to pay in full every month or curb your spending.

  2. Use tech to stay on track. If you tend to forget your payment due dates, automate repayments through GIRO or set calendar notifications on your phone.

  3. If controlling your spending is an issue, ask your credit card issuer to restrict your credit limit to, say, one month of your salary, rather than the usual limit of 4 months.

  4. Always remember that credit limits do not reset like a mobile data plan. You must repay every last dollar, with interest.

  5. To avoid spending beyond your means, opt for a debit card instead, which allows you to spend only what you have in your bank account. You can still enjoy payment convenience and other perks, such as cashbacks and rebates.

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