This post was updated on 26 June 2019 to include updated information.
According to the Singapore Department of Statistics, Singapore households had close to $10.6 billion in credit and charge card liabilities in the 2nd quarter of 2017. Approximately $2.2 billion of this amount is owed by people who have piled up debt that exceeded 24 times their monthly salaries, making it tough for them to pay it back.
Taking up interest-free instalments could very well be one of the reasons people get into such financial predicaments in the first place. Sometimes, you’ll find yourself being offered such deals in stores. You’ll try to debate the pros and cons, wondering what the catch is. You’re told that there is none because it’s interest-free. Sometimes, in the spur of the moment, we become weak and let ourselves be coerced into making the purchase – especially if it’s over a dream television set, European holiday or gym membership.
In your heart of hearts, you’ve always known there was more than met the eye. Before signing for another interest-free instalment plan, understand these 7 things about how they will impact your long-term financial well-being, especially if used wrongly.
#1 You Are Being Mentally Groomed Into Thinking This Behaviour Is Fine; And Will Likely Make More Such Purchases
For many people, interest-free instalments offer an easy solution to purchase products and services that you want right away. By receiving instant gratification where you would often need to save for months to afford, you are actually being groomed into thinking such actions are acceptable and will likely make more purchases on similar terms in the future.
You derive happiness instantly and this may lead you to recklessly continuing down this path for other things that you also want to buy. The problem is that by doing this, the amount you have to repay each month will snowball, and you may not even see a problem…until it’s too late.
#2 Your Available Credit Limit Will Be Lower
When you make a charge on your credit card, your available credit will be affected. What this means is that if you have a credit limit of $5,000, and your purchase is for a $4,500 gym membership over three years, you would only be allowed to spend $500 on that credit card, until you progressively make payments.
Of course, this is only a problem if you have one or two credit cards, or if you intend to make important big-ticket payments for a wedding or an upcoming holiday trip. You would hate to step into such a situation and realise you’ve used up your entire credit limit or have to use another card you don’t get as good a deal on at the last minute.
Of course, the TDSR (Total Debt Servicing Ratio) in Singapore means your score will also be impacted. And the amount it will be impacted by is the entire $4,500 gym membership over three years rather than the monthly $125 repayments.
This is because when you take up such a deal, the banks pay the companies the entire amount and you’re left with the debt to settle with the bank.
#3 You’ll Be Asked To Pay Some Fees, But You Already Kinda Knew This
In some cases, there will be some kind of fee worked into the charges you have to incur. This will likely be in the form of a processing fee or an administrative fee. In some occasions, they could even be a percentage of the amount you’re going to park under the interest-free instalment plan.
Again, you cannot really say you didn’t expect this was coming. The problem is that you will likely only know about this after discussing the whole plan and being sold on the deal. In other words, you’re already watching your favourite Netflix show on your new TV in your head by the time you know about these fees. By this time, you’d have invested too much time and emotions to let the commonly charged 1.5% to 5.0% fees affect your decision.
#4 If You Are Late In Your Payments, Expect Hefty Late Fees and Interest Charges
If you already find it hard to make repayments, it is likely you’ve already made too many purchases on instalment-free schemes. You should stop signing for any more products and focus on making your repayments.
This is because if you miss a payment, you’ll be charged a late payment fee as well as interest charges. You’ll also realise that this interest charge is not only for the amount that you couldn’t repay for the month, but for the entire outstanding amount with the bank, including the entire remainder of your purchase.
This also applies if you’ve simply forgotten to make payment on time. If you press hard enough, you may be able to get them to waive this if you’ve always been a good customer. Of course, this isn’t guaranteed, and you should not take any chances.
#5 Rewards (Air Miles, Cashbacks Or Points) Are Typically Not Given With Such Purchases
Most of the time, you will not receive any rewards for purchases made on your credit cards which are converted into an instalment.
This point is to be expected – the banks have made the entire payment upfront for you, and they need to earn some money. One way to “earn” is to limit the rewards they pay to you. Of course, they could have other methods, including the processing fees or late payment fees or even having a win-win payment structure with the merchants.
For example, if you spend $5,000 on your Citi Premier Miles visa card but you opt to pay for your purchase using an interest-free instalment plan, you will not receive the 6,000 miles (1.2 miles per $1 spent) that comes with spending this amount. If you were to value these miles at 1.5 cent per mile, this would be equivalent to be about $90 in value.
Cashback cards such as the Standard Chartered Unlimited Card will not earn you any cashback if you were to charge the spending to your card before converting it into a monthly instalment. So again, if you are spending $10,000 and converting the charge into an “interest-free” instalment, you are technically paying $150, which is what you lose out in cashback.
#6 Still Liable For Payments Even If You’re Unhappy With What You’ve Bought
For a long time, this wasn’t common knowledge. While it still flies under the radar, many were caught out when California Fitness abruptly closed down its branches in mid-2016.
Those who had opted to pay discounted memberships by getting deals spanning several years, and then using credit cards for instalment-free plans were burnt. They had to continue forking out monthly payments even though they obviously could not use their memberships anymore.
You have to understand that your payment terms is now with the bank instead of the merchant.
The same thing will apply if you buy an electronics product from Courts. If you’re not happy with the product, you cannot stop paying for it. You have to seek recourse with the merchant, Courts in this case, rather than with the bank.
#7 You Can’t Cancel Your Credit Card Now… So Expect To Be Slapped With Membership Fees
If you’ve signed for instalment plans spanning several years, you should be aware that you cannot cancel this credit card during that period, which means you will likely have to pay its membership fees. This is, of course, another way that the banks can earn revenue from you, their customers. Other options which you may find no longer being available to you would include not being able to cancel a credit card if you are being charged a late payment.
In some occasions, if you continue being a good customer or have spent a sizeable portion on other purchases on the card, they may still waive these fees. But don’t bank on it.
Prepayment is also usually not an option. Yes, banks do not want your money early – one reason could be to earn from membership fees. Other reasons could include continuing to entice you to make more purchases in the near-term.
No Such Thing As Free
Living in Singapore, you really should have guessed that there is never such a thing as free. There’s usually always a reason that certain products or services are being sold in a certain way.
On your part, you have to be prudent with your payments and only use interest-free instalments on products and services that you really require right now but cannot afford to pay for it at one go. These usually include essential furniture for your home. If it’s a luxury item, try to avoid such payment terms.
Missing any payments will mean being slapped with hefty fees and charges, so you’ll want to completely avoid that as the price of your product or service will only get more and more expensive with each new charge.