5 things you should never charge to your credit card
A credit card makes purchases convenient, too convenient at times. While there are plenty of benefits to buying via a credit card, some items are still better dealt with in cash (or maybe a debit card). Here are some of the things to avoid putting on plastic:
1. Instalment plans for spa packages or gym memberships
Many cards have interest-free instalment plans, for a pricey spa package or gym membership. The packages often range between $3,000 to well over $8,000 per year, which you can pay off via credit card instalments.
The first thing to note is that, when you charge this to your card, you are not just charged the first month’s payment. The entire amount is immediately charged to your card, following which you make regular instalment payments.
This immediately lowers your credit limit. More importantly, it means you’re in serious trouble if the spa or gym closes: you cannot “stop payment” because you already used the card to pay in full. You’re paying instalments to your bank, not to the fly-by-night spa / gym that pulled a fast one on you.
So if you’re going to use your card for interest-free instalment plans, make sure to use it forphysical products that you can bring home. Think refrigerators, laptops, and air-conditioners. Avoid using instalment plans for pre-paid services, which could shut down at any time.
2. Other credit card bills, unless you have a zero-interest balance transfer
You can always pay a credit card with another credit card. However, you absolutely should not do it, unless using a zero-interest balance transfer.
When you pay one credit card with another, a fee will be charged (typically around 1. 5%). You are also not reducing you debt, as the other credit card will continue to charge you interest at the same rate. In fact, constantly bouncing your debt from one card to another just causes it to snowball faster.
If you’re trying to consolidate your credit card debt, you need to use a zero-interest balance transfer instead.
Zero-interest balance transfers allow you to pay one or more credit cards with another, for a small fee; however, you will usually be given six months to pay off the debt, with no interest charged. For example:
Say you owe $3,200 on credit card A, and $1,100 on credit card B. As they both have an interest rate of about 26% per annum, you don’t want to accumulate interest on both cards (that’s expensive!)
You can then use a zero-interest balance transfer on credit card C: you transfer the total debt ($4,300 total from Cards A and B) to card C. You’ll be charged a small fee – say 1.5% ($64.50), after which you have six months to pay off the $4,300. There’s no interest charged during those six months.
Do not start using credit cards A and B again, until the balance transfer is paid off (otherwise you’ll never finish paying your debts!)
Call your bank, to ask if any of your credit cards have this function. But in future, we suggest you always pay your credit cards in full.
3. Non-optimised purchases
If you compare credit cards on GoBear.com, you’ll see different cards are optimised for different purposes.
For example, the American Express Kris Flyer cards give you 1.1 – 1.2 bonus miles for every dollar spent, making your travel expenses cheaper. The Maybank Family & Friends card, on the other hand, gives you nothing in the way of miles; but it does provide 8% cash back on groceries.
When deciding which card to use, think about what would benefit you most. If you’re a frequent traveller, you’ll almost always want to use an air miles card. If your concern is the grocery budget, then cashback should come first.
When you make a non-optimised purchase, you’re wasting money. For example, say you use a non-petrol card to buy $80 worth of fuel. you get about eight reward points, which might get you maybe a 1/10th of a movie ticket (i.e. you need 80 reward points to receive one).
However, say you use the Standard Chartered Unlimited Cashback credit card, at a Caltex petrol station. You would get a 21% discount ($16.80), plus a further 1.5% cashback ($1.20), thus saving your $18.
4. Anything you can’t pay in full, before the end of the billing cycle (unless you have interest free instalments)
If you need to borrow money for a big-ticket item, don’t use your credit card. A credit card only saves you money when used as a method of payment, and not as a source of loans.
The interest rate on a credit card is between 24% and 26% per annum. This is much higher than personal loans, which are generally around 9% per annum (and cheaper options abound during promotions).
If you’re going to take several months to pay something off, do yourself a favour and get a personal loan instead. Avoid having rollover debt on your credit card, if possible.
An exception to this is when you have zero-interest instalment loans, on your credit card. Even then however, be selective in what you buy with such plans (see point 1).
5. Cash advances
A cash advance is when you withdraw cash from your credit card. There are added fees for cash advances, typically up to 6% of the amount advanced (with a minimum charge of $15). In addition, some credit cards charge even higher interest for cash advances – these can go up to 28% per annum.
You also won’t get reward points, cashback, or bonus miles for cash advances.
This is an all-around bad deal, to be avoided at all costs. If you need to borrow money, and you need it in cash, then get a personal instalment loan. These can have interest rates as low as 6% per annum, and the money is credited straight into your current account (just withdraw the money at an ATM).