Don’t make these mistakes when choosing your next credit card
Credit cards offer users a host of benefits. In many ways, they are far superior to cash and you can pay by card practically anywhere. In addition to being extremely convenient, cards can offer you significant financial advantages. You can earn cash rebates on many purchases and most cards offer some form of rewards points.
Singaporeans use credit cards extensively and it is common to see people who have wallets stuffed with a number of cards. If you have a good credit record and meet the basic eligibility criteria laid down by the issuing bank, a new credit card is fairly easy to acquire.
But how do you know whether you are making the right decision when applying for a card? Should you opt for one that offers the greatest number of rewards points or is it better to select a card based on other criteria?
The most sensible way to choose a card is to first understand your spending pattern. Do you use your card to shop online? Or do you regularly spend at restaurants, hotels, and bars? After you analyse how you spend your money, you should look for a card that can provide you with the maximum benefits.
For instance, cashback credit cards have one of the most popular types of benefits that a credit card can offer. What could be better than getting a certain percentage of your money back every time you spend?
However, if you are applying for a new card based on the cash back it offers, there are some points that you must check. Obviously, the percentage of the cash rebate that the bank is offering is important. If this is fixed at, say, 4%, is the same rate applicable to all categories of spending?
The ANZ Optimum World MasterCard Credit Card is a popular choice with those looking for cash back benefits. It offers a 5% cash rebate on one category of expenditure. The other categories earn a much lower 1%. What are the different categories for this card?
- Dining & leisure – restaurants, hotels, bars, and cinemas.
- Travel – airlines, travel agencies and online travel portals.
- Shopping – fashion boutiques, online fashion stores
- Groceries – supermarkets.
Cardholders get the option of selecting one of the above categories. They will earn a cash back rebate of 5% of the sum they spend. They can switch categories every quarter. The total amount of rebate that you can earn is unlimited.
Applying for a card just because it is being promoted
This is a mistake that many individuals make. When a particular card is being promoted by a bank, they apply for it in the belief that it is the best choice. While the card could offer many benefits, it may not be suitable for your requirements.
Before applying for a card, it is advisable to check whether it will give you a cash back rebate or reward points for expenditure that you already make. For example, you may spend large amounts on groceries every month. But if the cash back on this category is only 1%, your choice of card may be incorrect.
Cards which offer generous reward features often require you to spend a minimum amount every month or every quarter. To meet this requirement, some cardholders roll over part of their balance and pay interest on the outstanding amount. There could also be instances where you forget to make a payment, leading to a situation where the bank would levy interest and other charges.
Neglecting the interest rates and fees that the card issuer charges
What is the rate of interest that is payable to the card issuer for rolling over your balance or for making a late payment? Let us take the example of the amounts levied by DBS Bank.
When you receive your monthly statement from DBS Bank, you need to pay at least 3% of the outstanding amount immediately. Payment of the remaining sum can be deferred to subsequent months. The bank will charge an interest rate of 25.9% per annum on the outstanding balance.
What if you take a cash advance against your DBS credit card? You will have to pay 6% of the amount withdrawn as a fee. In addition to this, you will need to pay 28% per annum as the interest cost on the advance.
Other banks in Singapore charge similar rates of interest. It is apparent that you could pay a significant sum to the card issuer against fees and interest costs. Before finalising on a card, it is important to compare the amounts they charge for various facilities that they provide.
Ignoring how the rewards system really works
Reward points can be a major attraction for cardholders. The Citi Rewards Card can be a good choice for those who shop extensively at Amazon. You can earn 20X reward points for the online purchases that you make on their website.
What does this 20X really signify? Each S$1 that you spend earns you 20 “Citi Dollars” under this scheme. Every 420 of these Citi Dollars translates into S$1. This means that for S$100 spent on Amazon, you will get points that will be worth just under S$5 (S$4.76 to be exact). There are other terms and conditions as well.
When you are deciding on which card to apply for, it is useful to spend a little time on understanding how the reward system works. This will give you an idea about the benefit that you will actually get.
Deciding on a card in a hurry
There are dozens of credit cards that Singaporeans can choose from. Each offers different benefits and it is really up to you to decide which is the most suitable for your needs.
The best approach is to first determine how you intend to use the card. Subsequently, you can shortlist three or four cards and then finalise on one after carrying out a detailed comparison.