Photo: Sean MacEntee
If you don’t have a credit card, you probably feel smug when you hear about another bankrupt on the news. You’re financially prudent! It would never happen to you because you don’t use plastic!
Well you’d better take a seat, because most of your assumptions are wrong. In fact, you’re probably wasting more money by not using credit as a mode of payment:
The Joys of Credit Cards
Why own a credit card? The main reason is not to be able to borrow money. In fact, relatively few people with credit cards are frequent revolvers (people who consistently fail to pay back the full sum of their debt). Most people use credit cards because:
#1 When Used as a Mode of Payment Only, Credit Cards Save Money
To use a credit card as a mode of payment means not relying on the credit function at all. Every time you use the card, you immediately pay back the charged amount in full. Why bother to do this?
Because banks make money whenever you use the credit card for transactions, and they will pass down some of the benefits to motivate you to use their card. An example of this would be a cashback credit card.
Suppose you put all your shopping costs on a card with 6% cashback. If you spend S$1,000 a month, and always paid it in full, you would get back S$60 a month in cashback. You wouldn’t be able to do that if you paid in cash (and you need to pay in full when using cash anyway, so there’s no difference).
#2 Credit Cards Give You Rewards and Discounts
Many different merchants, from restaurants to retailers, will give you discounts for using specific credit cards. The bank constantly negotiates deals for its cardholders, so you can get offers like one-for-one movie tickets, special dining menus, free entry at certain clubs, etc.
Credit cards also accumulate rewards points. These can be traded in for cheaper air travel, more discount vouchers, membership in dining clubs, etc.
Since you’re going to buy things anyway, you may as well get something out of it. Just by paying through your credit card (remember, there is no charge for doing so), you can get a better deal and save some cash.
The key is to find the best credit card in Singapore for your personal needs. Compare different cards to find the one best suited to your expenses.
#3 The Credit Card’s Interest Rate is Irrelevant if it’s Used Responsibly
Many people worry about the high interest rate on a credit card. This is admittedly true, at 24% per annum (around 2% per month) the interest rate on rollover debt is high.
However, 24% of $0 is still $0. If you pay back the card in full (as you are meant to), you will not pay any interest ever. This is, in fact, the way that most people use their credit cards.
#4 It Helps to Avoid Having a Thin Credit File
A “thin credit file” occurs when you have never used credit or loans. As the bank cannot check your repayment history, they will be uncertain as to whether you will responsibly pay loans. They may be willing to lend you a lot less the first time you need a major loan for education, medical reasons, a personal business, etc.
#5 It is the Most Easily Accessible Form of Cash in an Emergency
When you are overseas and run out of cash, it could be difficult – if not impossible – to draw more cash from your account back home. There may also be situations when you’re at a restaurant or in a cab and short on cash (you should avoid these with prudent financial planning, but they can happen).
In these situations, you do not have time to head down to the bank and apply for personal loans. You need cash immediately and a credit card provides an instant source of funds.
The Only Pitfalls
There are only two serious drawbacks to credit cards. The first is that, if you don’t pay it back in full, the interest eclipses any savings or discounts. Always pay your credit card debt in full. The second is that, if you make a habit of not paying back your debts, you will end up with a bad credit score. This could impact your future loan approvals, so avoid constant late repayments or defaults.
Overall, it’s obvious that there are actually few drawbacks to using credit cards. The key is to use them with knowledge and discipline, and only ever as a mode of payment.
