Many of us have heard stories of individuals racking up huge debts from grossly overspending and incurring late payment fees on their credit cards. However, this should not deter you from applying for one and using it for your day-to-day expenses. We strongly believe that credit cards can make a lot of financial sense if used correctly.
To eliminate any fear you may have of using multiple credit cards, it is imperative that you understand the functions and characteristic of credit cards before applying for one. We have identified 11 things that you should know before applying for any credit card.
# 1 What Is a Credit Card?
The first question may seem straightforward, but not everyone fully understands what it is. A credit card is a payment card issued by a bank. It functions as a tool to borrow money from the bank, which has to be repaid at the end of each statement month.
As long as you pay the bill in full, there will be no extra fees or interest added to your monthly bills. Most banks offer online banking and mobile banking applications, which can be useful and convenient to monitor your credit card expenses and spending habits.
# 2 What Happens If I Do Not Pay the Bill in Full?
When you receive your monthly credit card statement, there is a segment which indicates the minimum amount you need to pay. The sum is typically a percentage of your outstanding balance or a specified amount (normally $50), whichever is higher. Should you miss the payment cycle or fail to fulfil the minimum payment, you will be slapped with a late payment fee.
Paying only the minimum payment is also a bad idea, even if it is punctual. You will be charged a monthly interest and worse still, the interest is compounded daily. The effective interest rate is about 25.9% per annum for most banks, which can potentially snowball your outstanding balance into a frightening figure over time.
# 3 Do I Need A Bank Account Before Applying For A Credit Card?
You do not need to open a bank account with the bank to apply for a credit card with them. This is because your credit card is simply an instrument for short-term borrowing. At the end of each monthly cycle, all you need to do is to repay the bank the amount you owe.
Payment of your credit card bill can be done through many methods, such as online banking, cheque, AXS stations (or e-Station) and bank branches.
Alternatively, you can set up a GIRO arrangement for your bill to be automatically paid every month. This way, you also never miss a payment or end up paying it late.
An interesting point to note is that credit card repayment can also be done via bank accounts which is different from the credit card issuer. For instance, you have an existing bank account with DBS and own a UOB credit card. Instead of opening a UOB account specially for bill payment, you can do so with your DBS account.
# 4 What Is Your Credit Limit?
Your credit limit is the maximum amount of money you can “borrow” from the bank on your credit card. When applying for a credit card, you can propose a credit limit (subjected to approval), or let the bank decide the limit for you. This is usually a few times of your monthly salary. If you hold multiple credit cards from the same bank, the credit limit will be shared among the cards. In the event you wish to revise your credit limit due to a change in your income, you can do so by submitting your latest income documents.
If the maximum credit limit of your credit card is reached, no further transactions can be done. In order to refresh your credit limit, you must pay off your credit card bill. Repayment does not necessarily need to be at the end of the billing cycle. If you ever need to refresh your credit limit before the end of the billing cycle, you can simply make an early repayment. For example, if you have a credit limit of $6,000, and purchase a computer for $1,500 and pay a further $4,000 for an upcoming holiday on your credit card at the beginning of the month, you will have $500 of credit limit left. To refresh your credit limit back to $6,000 to continue paying for your daily expenses for the rest of the month, you need to make an early payment of $5,500.
# 5 How Many Credit Cards Can I Own Concurrently?
There is no limit on the number of credit cards you can own. If you are interested in more than one card from the same bank, there’s nothing stopping you from simply going ahead to apply for it. In this scenario, your credit limit will be shared amongst your cards from the same bank. Applying for another credit card from the same bank also saves you the trouble of having to re-submit your documents.
If you want to apply for another credit card from a different bank, there’s also nothing stopping you from doing so. In this scenario, you have to submit all relevant documents to them. The upside is that you effectively increase your credit limit. This means you can have a $6,000 credit limit with one bank and a further $6,000 credit limit with another bank – increasing your total credit limit to $12,000.
Do note that it is generally not a good idea to have too many credit cards though, as it will be harder to keep track of the bills. This is because each credit card has its own billing cycle, which is determined the moment you activate the card. Your credit scores may also be affected as you continue to seek more credit from financial institutions.
# 6 What Are Mastercard, VISA, American Express, UnionPay, etc?
If you examine your credit card, you should see at least one logo at the bottom right corner. These logos are the brand of the payment networks. With thousands of banks in the world, and it is impossible for each to have their own payment network. Hence, banks leverage on popular payment networks that are recognised in many parts of the world, to facilitate overseas and online transactions.
Common card payment networks include Mastercard, Visa, American Express and UnionPay. Holding these cards enable you to make payment in every part of the world that accepts them, even if the bank is not available in that country.
Some credit cards also have co-branding partners to give deals exclusive to the cardholder. One example is DBS Esso Mastercard which provides Smiles points for eligible spending. The points can then be redeemed for fuel Esso.
# 7 What Are the Requirements To Apply For A Credit Card?
Most cards require you to earn a minimum annual gross income of $30,000 for Singaporean citizens and permanent residents. This is equivalent to a monthly income of $2,500. Foreigners usually have a higher minimum income requirement to satisfy, usually pegged at $45,000 per annum and above. There are cards with higher income requirements as well, but they also typically provide better perks. Certain higher-end cards such as The American Express Platinum Card are only issued by invitation only.
Generally, you need to be at least 21 years old to apply for credit cards. There are credit cards that cater to students as well who are 18 years old and above. You are required to submit documents for proof of identification (NRIC or passport) and income (payslips, tax documents, CPF statements). For student credit cards, proof of income is not required. These documents can be submitted to the bank in person, or online from the comfort of your home.
# 8 How Much Are Credit Cards Annual Fees?
Although it is free to apply for credit cards, most come with annual fees. Annual fees can be as low as $29.96 for student credit card and as high as $535 for top-tier credit cards. The most common annual fee for credit cards in Singapore is currently $192.60 for credit cards with $30,000 annual income requirement.
Fees for the initial one to two years are typically waived. Some cards also have annual fee waivers if you meet the stipulated annual minimum spending. It is also common for people to request for credit card fee waiver and some banks even automated the fee waiver system on their hotline.
You should always aim to get your annual fee waived unless you are compensated for paying the fees. For instance, the DBS Altitude Visa Signature Card gives you 10,000 bonus miles when you pay your annual fee of $192.60. This translates to “buying” airline miles at a rate of 1.9 cents per mile, which is a pretty good value.
Annual fees are collected at the start of each card year. If you are unable to get your annual fee waived, consider if the card is still worth keeping. If not, you may want to pay off the bill (minus the annual fee) and terminate the card.
# 9 Can I Withdraw Money From the ATM?
It is possible to withdraw money from the ATM using a credit card. To do that, you need to have an existing bank account and linked it to your credit card. If not,what you’re actually doing is utilising cash advances on your credit card – a service which you should avoid at all costs.
A cash advance is an act of borrowing from the bank against your credit limit. The difference between this and spending on your credit card is that interest is charged immediately on the amount that you withdraw, and compounded daily. Not only is the interest rate higher, a fee will also be charged for making the cash advance.
# 10 What Is the Difference Between Debit and Credit Cards?
When you make a transaction with your credit card, you are basically borrowing money from the bank to make a purchase. Transactions on debit cards are directly deducted from your balances already in your bank account. You will need a bank account to use debit cards while it is not required for credit cards.
Debit cards generally have no or very low annual fees. However, they also usually offer less perks compared to credit cards. Debit cards are also supported by payment networks such as Mastercard and VISA, hence you will be able to make online and overseas transactions.
Unlike credit cards, there is no income requirement to apply for debit cards. This is because there is no risk for the bank, as you are spending money you already have in your bank account. The minimum age requirement is also more lenient, with a minimum age of 16 years old compared to 21 years old for credit cards.
# 11 What Is a Supplementary Card?
When you apply for a credit card, you are the principal cardholder. As a principal cardholder, you can extend the privileges you enjoy on your credit card to your family by applying for supplementary cards. You can do so if they are a family member and are above 18 years old. Identification documents are required but not the income document.
The credit limit for the card will be shared with the principal card and the bill will be consolidated. Most supplementary cards have a lower annual fee as compared to the principal card, usually less than $100. The supplementary cardholder generally enjoys most of the benefits like the principal cardholder but there may be some preclusion.
The principal cardholder will be paying the amount spent by the supplementary cardholder. Similarly, failing to do so will result in a debt that is recorded under the name of the principal cardholder.
From a statistical standpoint, there will always be a group who are unable to repay their bills on time. Compound interest will then work in the bank’s favour when high-interest rates are charged on their outstanding balance. Thus, it is imperative to always repay your outstanding balance on time and in full, to avoid incurring high-interest rates.
We hope that you have learned enough to know how to protect yourself from incurring credit card debts. Credit cards have its pros and cons, but it is important to spend responsibly and keep track of your expenses. When used correctly, using credit cards for payments can make a lot more sense than using cash.