5 reasons not to overspend on credit cards
With more than 9.2 million credit and charge cards in circulation at the end of December 2016, Singapore has some of the highest number of credit cards in circulation in the Asia Pacific region as a percentage of its population.
But, living on borrowed money has its drawbacks, the least of which includes having to spend a sizeable portion of your income on credit card dues and interest fees. Not to mention the higher likelihood of chalking up a credit card debt. As of December 2015, the number of delinquent debtors – those who fail to pay the minimum sum on their credit card dues – hit more than 100,000.
Here are some reasons you need to cut back on your reliance on plastic.
No easy cure for overspending
Once you are addicted to spending more on your credit card than you can pay back, that's when the trouble starts.
If you fail to make your payment within the stipulated period, you would then have to pay the principal amount and interest fees – which can be as high as 20% per annum in interests depending on the card provider – on subsequent bills.
As an example, if your credit card bill is $100,000 and you failed to pay $80,000 of this sum within the grace period, interest will be charged on this $80,000.
Typically, the interest rate is expressed as an APR (Annual Percentage Rate) that can fluctuate within a wide range of values, although it usually stays within the 18% to “less than 30%” range. Continuing with the same example, you could end up paying anywhere from 18% X $80,000 = $14,400 to 29.9% X $80,000 = $23,920 a year in interests alone.
You may be charged an annual fee that you never knew about
Many credit card users may not be aware of the annual fees the charged by credit card issuers, which may be hidden within the mass of instructions that comes with the card. That means, you may not notice when you have been charged an annual fee after a certain period.
For the first year, your annual fee is often waived but for subsequent years, you may end up getting charged anywhere from slightly more than $100 to around $200 in annual fees. The finer details are often lost in the fine print.
Identity theft or data breach can cost you
In the case of identity theft, a data breach, credit card skimming, or any other forms of fraudulent activity related to credit cards, these will cost you if you are not alert and inform your card company immediately.
The more you splurge on spending borrowed money, the greater the chance that you hand over your credit card to a potential skimmer in some casual dining establishment, a renowned luxury brand or some of your most favourite haunts.
What's worse, is that you may not even notice that your identity has been stolen or that your card has been used for fraudulent transactions, because of the overwhelming number of transactions that you would need to pore over to find out exactly which, if any, purchase was not initiated by you.
Adverse effect on credit grades of delinquent and revolving debtors
If you fail to pay anything or if you pay back some amount that is less than the minimum sum stipulated by your card company by the due date, then you are considered a delinquent debtor.
Likewise, if you manage to pay only the minimum sum stipulated but not any greater amount, then you are considered a revolving debtor.
In both cases, delayed or impartial payments affect your credit score or credit rating. The credit score can range from a high of 2000, indicating the best possible score, to a low of 1000, indicating the worst.
In Singapore, credit grades are used to judge the credit worthiness of prospective debtors. If you need to borrow, say for personal reasons or for big ticket purchases like a car, creditors will judge you based on your “credit risk grade”, which can range from AA to HH under normal circumstances.
Your “credit risk grade” is determined by your credit score, which you can learn about in your credit report for a nominal fee of $6.42 inclusive of GST.
Sounds confusing? Fret not. Simply put, creditors – which are usually banks or other financial institutions or lenders – want to determine how creditworthy you are before they would lend you money. To determine that, they would look at your credit risk grade and if your credit grade is poor, then you would end up either getting a smaller amount of loan or getting denied any loan altogether.
Not a very appetizing prospect, is it?
Hard to exit the vicious cycle of debt
Once an individual ends up in the nasty debt trap, it’s very hard to exit this predicament. A debt trap may not necessarily be a death trap, yet in some sad circumstances, it may very well lead to one, particularly if debtors opt to repay their credit card loans with borrowed money from unlicenced lenders.
If you are not wise or careful enough to read the fine print and use your best judgement, you may be in for some shock.
Use your best judgement
At the end of the day, you are responsible for your actions. Any decision you take regarding borrowing money will impact you first. So, use your best judgement.