Everyone has their preferred payment method. Some like using cash whilst others prefer new methods of payment like Apple Pay and Google Pay. With the heaps of travel rewards and other tangible benefits from paying with a credit card, it is no wonder that about 90% of the Singaporean population owns at least one debit or credit card. Although credit cards offer great perks, there are many risks associated with credit cards.
It doesn’t matter if you already hold multiple credit cards or if you are a new user, it is easy to make mistakes and understanding the dangers of credit cards can help you cultivate better credit card habits to use credit cards responsibly and avoid the many traps that so many consumers risk falling into every day.
Related: 3 Money Mistakes That You Commit Without Even Trying
Credit Card Dangers & Potential Ways to Avoid Them
Here are some of the common dangers of Credit Cards and some ways we have identified for you to avoid them.
Temptation to Overspend
Access to credit can be tempting when you spot items that you want to purchase but can’t afford. It is easy and convenient to spend money with credit cards, and you don’t feel the pain of cash leaving your wallet. This makes it easy to overspend, a pertinent problem amongst Singaporean youths today.
In the long run, a lack of self-control over your finances could ultimately rob you of financial security. Your credit limit should be thought of as a loan provided to you by a credit card provider as opposed to ‘free money’ to spend.
How to avoid this pitfall: Set a personal spending limit with your credit card below your credit limit, based on how much you are willing to spend each month. Be careful not to spend on unnecessary wants that you don’t really need or live a lifestyle that you cannot afford.
Related: 3 Reasons To Own & Use A Credit Card And 1 Reason To Not Do So
Carrying Balance & Incurring High Interest
Paying credit card balances in full each month allows you to avoid paying any interests at all. If you carry your balance over to the next month, you could end up paying very a significant amount of interest. Credit card interest rates could vary depending on your card, but they often run high. If you’re not paying your bills in full, then a portion of your payments goes towards interest payments, increasing the time needed to pay off your bills. This could very well be a strong indication that you are spending more than you can afford.
How to avoid this pitfall: Pay your credit card balances in full every month to avoid paying any interest at all. If you can’t pay in full, try to pay as much as you can each month and bring the balance down to zero before making any more purchases. Bear in mind your financial status at all times before making any future purchases.
Related: What are the Repercussions of a Late Payment on Your Credit Card?
Risk of Debt
Remember that using credit cards means taking a loan from credit card providers to make payments. Any time that you borrow money, you are creating debt. The more you borrow without repaying the debt, the deeper you go into debt. Debt could lead to numerous other problems, creating stress, depression, health issues and even family problems. Failure to manage debt in the long run could also potentially result in bankruptcy.
How to avoid this pitfall: Recognise the signs when you are heading towards debt, particularly when you are consistently unable to pay off your balances every month. Stop using credit cards and focus on living within your means with other payments such as cash and debit cards.
Related: Debt Consolidation – How A Personal Loan Can Help Save Money Paying Off Credit Card Debt
Missing Credit Card Payments & Credit Score
Credit Scores are vastly affected by your payment history. Hence, missing credit card payments could have a significant impact on your credit. Not only would missing payments give you a late fee, default records of outstanding or partial payments could potentially be displayed indefinitely on your credit report. A bad credit score could affect your chances of getting loans, rates that you pay and types of financial options available to you.
How to avoid this pitfall: Set up automatic payments such as GIRO, so that you won’t have to worry about forgetting to pay your bills and not paying on time. However, you still need to be responsible for ensuring sufficient funds are available in your bank account when the automatic payment is withdrawn from your account. Alternatively, you could create calendar reminders each month when your monthly bills are due.
Related: True Story: How I Raised My Credit Score From DD To AA Grade In 6 Months
Minimum Spending
Only a small payment is needed each month to keep your account in good standing and to avoid late payment fees. This is termed as Minimum Payment. Unfortunately, this may give you a false sense of security of your financial status. If you only pay off the minimum amount, your interest will continue to pile up and more time is needed to pay off the credit card balance.
How to avoid this pitfall: Paying off your balance in full is the most ideal. If unable to do so, pay off the most you can each month to get repay some part of the principal, instead of reducing the interest only.
Related: Why You Should Avoid the Monthly Minimum Credit Card Payment Trap
Multiple Credit Cards
Every credit card offers varying benefits in various categories. It is understandable to apply for multiple credit cards to enjoy different promotions. However, adding multiple credit cards to your usual spending methods could make it more difficult to keep track of your spending. In addition, holding multiple credit cards in your wallet could make you more susceptible to the above traps mentioned, together with the problem of credit card churning.
How to avoid this pitfall: Hold no more than three to five credit cards at a time. Take a couple of months to monitor and analyse your spending habits and categorise them. Do you spend mostly on groceries? Or Shopping? Apply for credit cards that offer good benefits for multiple categories and own a maximum of one credit card for each category. Track your expenses via a spreadsheet or spending planner.
Related: 3 Best Credit Cards For Women In Singapore
Looking for credit cards suitable for you?
If you are unsure of what credit cards are suitable for you, here are some recommendations.
Citi Cash Back+ Card
Citi Cash Back+ Card offers one of the highest unlimited flat cashback rate of 1.6% on all expenditures in Singapore and abroad, making it ideal for high-spenders looking to maximize their rewards on all spend with no limits.
Pros
- Affluent consumers spending S$7k+/mo
- People interested in an easy-to-use flat rate card
- Those looking to avoid spend requirements or rewards caps
Cons
- Average or lower spenders looking to maximise rewards
- Those with specialised spend (i.e. dining, shopping)
- Consumer looking to avoid an annual fee
DBS Yuu Visa Card
The new co-branded credit card, which works hand in hand with the yuu app, can be used to earn rewards points to be redeemed across various merchants. Earn up to 36x the yuu Points at over 1,000 establishments across Singapore.
Pros
- Good rewards for supermarket and food delivery spend
- No minimum spend and no cap to base rewards with Yuu merchants
- Able to earn upsized cashback with a minimum monthly spend of $600
Cons
- Low cashback with non-Yuu merchants
- Limited retail Yuu-merchants
KrisFlyer UOB Credit Card
UOB KrisFlyer Credit Card is a great option for SIA Loyalists who tend to fly on a budget.
Pros
- 3 mi per S$1 on SIA, SilkAir, Scoot & KrisShop
- Up to 3 mi on dining, transport, online shopping & travel
- Expedited KF Elite Silver status, Scoot privileges
- 10,000 annual bonus renewal miles
Cons
- Just 1.2 mi on non-category overseas spend
- No lounge access perks
- No spend-based fee-waiver
The convenience and rewards that credit cards offer are indeed tempting, but the lack of responsible use could land you in a disastrous situation. Nonetheless, if you avoid complacency, exercise self-discipline and restraint, and keep track of your spending and financial habits, you could reap the myriad benefits that credit cards bring.
Remember: Be your master of credit, not the other way around!
If you want a credit card for a specific purpose or wish to compare credit cards to determine the most suited option for yourself, check out our other pages.
Compare The Best Credit Cards in SingaporeFind Out More
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- Cash Or Credit Cards: Which Is Better To Use When Travelling?
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