Over the past few months, a couple of banks, most notably, OCBC and DBS, have announced that they will be increasing their credit card late payment fees.
The announcements is a timely reminder to Singaporeans that missing our credit card payment is a costly matter that is never acceptable, and which we should all strive to avoid.
Though considered a far superior payment solution compared to using cash, credit cards have the potential to quickly drown an individual in debt if he or she is not careful in managing their own credit cards usage.
With monthly late fee payment as high as $100 and interest rate of up to 25.92% per annum, unpaid credit card bills can quickly snowball into huge, unsustainable debt.
Using Credit Cards To Spend On What You Don’t Currently Have
$5,000 may seem like a large sum of money to be using your credit card for but that’s not really true in today’s context. $5,000 may be the cost of a 10-day holiday for two, the cost of the latest laptop with some add-ons, or one branded sofa for your new home.
Now let’s assume you bought one of these items impulsively using a credit card with money you don’t actually have. If that happens, you would not be able to pay your bill in full by the due date. Your credit card debt will be rolled over to the following month and you will incur these additional costs.
Late Payment Fee – $100 per month
Interest Cost – 25.92% per annum, calculated on a daily basis
Here’s how quickly your credit card debt can snowball within one year.
* We calculated interest rate on a monthly basis, rather than daily. Actual figure will be slightly higher when calculated daily due to larger compound effect.
You Pay $2,600 More Within One Year For A $5,000 Purchase
The simple observation here is that non-payment of your credit card bill would lead to an initial $5,000 purchase turning into a more than $7,682 debt within one year. This is due to the combination of interest rate (charged at 25.92% per annum) and late payment fee (charged at $100 per month).
Credit Cards Are Great, But You Need To Maintain Financial Discipline
We have written previously about why you should use credit cards as often as possible. If you manage your credit card bills wisely, it can help you save money through the discounts you enjoy, cash rebates you receive and the air miles you earn. If you opt to pay by cash instead, you forgo all of these additional perks.
Credit card users have to be responsible in controlling their spending. Here are some rules that you should always keep in mind.
Never use money you don’t actually have: Your credit card should be seen as a payment method, not a line of credit. That means you need to be spending money you have. If you buy something for $3,000, make sure you have that money in your savings account.
Always pay in full: Unless you have been told specifically by the credit card company not to pay in full due to dispute charges, there is no other circumstances where you should not be paying your bill in full at the end of each month. This is a habit you should cultivate from the first time you use your credit card. If you can’t make it a habit, use a debit card instead.
Use an app to keep track of your spending: There are credit card apps that you can download to keep track of your monthly spending. One such app is Seedly, a made-in-Singapore app that helps users keep track of their credit cards spending. By using Seedly, users will know how much they are spending each month, and what they are spending it on. That also means you can keep track of your spending habits without painstakingly writing down everything on a note pad, and then transferring it onto an excel table.
What else can Singaporeans do to avoid falling into the credit card debt trap? Discuss your tips with us on Facebook. We would love to hear from you!