Why credit cards are good for you

“No man’s credit is as good as his money”. If everyone just applied this to himself – or herself, it would save a lot of people and countries from bankruptcy.

Credit is a great boon that people should see as a privilege coming from their past diligence with money instead of a God-given right that is bestowed once a person turns 21. But it can be forgiven if anyone thinks as such because of the proliferation in banks seeking sub-prime borrowers for higher returns and stuffing credit cards down the throats of anyone unfortunate enough to pass by one of their public booths.

Credit comes in many forms: credit cards, bank loans, installment plans and even post paid handphone bills. And we all need to manage this credit everyday otherwise it can very quickly turn into quicksand.

The credit industry is worth almost 300 billion dollars. And having credit is great, but I don’t really want to go into too much specifics of having using a credit card or a home loan just yet, I just want to make the point that having credit available to you is wonderful. You get to enjoy sums of money you could never have while paying a small premium for using it. The question I want to ask is in the headline; “can you afford it?”.

If you have a credit card and decide to roll over your outstanding balance, can you afford seeing a 24% interest being charged in your next bill on every transaction you made the following month and not just the amount that was rolled over in the first place?

If you miss your home loan for a few months because you miscalculated the floating rate interests that kick in after the 3^rd year, can you afford to have your home foreclosed by the bank and the credit bureau of Singapore flagging your credit status and affecting your ability to get future credit?

If you stop paying the installments for that 3D LED television set you thought was such a great idea 4 months ago, can you afford to have the store seize the item back, forego the payments you already made and earn that black mark on your credit standing?

I know its getting a little bit preachy, but I want to drive home the idea that being abused by credit is the silliest thing anyone can let happen.

And using credit is almost the best thing. Its even better having a home loan for example than being debt free. Let me first show you this discussion;

 

Assets:

Cash/CPF                   $250,000

Other investments     $250,000

Property value          $500,000

 

Liabilities:

Home loan:                $400,000

Net Wealth:                $600,000

 

Now, lets say he uses his CPF/Cash to reduce the housing loans

 

Assets:

Cash/CPF                   $0

Other investments     $250,000

Property value          $500,000

 

Liabilities:

Home Loan:               $150,000

Net Wealth:                $600,000

 

This individual’s net wealth is still at $600,000, and he has no cash or CPF in this instance. We all know having a home loan is the cheapest loan available as there is a very secure collateral for the banks in the case for default. So paying the current interest of 1.1% and using the $250,000 in an insurance policy paying at least 3.5% is an option for people who don’t know the first thing about investing money.

I won’t even start mentioning that the interest paid on your home loan still earns you a deduction form your income tax, and other benefits of having cheap loans. Even credit cards are extremely beneficial to people. But I’ll leave those to other articles.

I just want to round up this article by reiterating that I am a huge fan of abusing credit given to you to the fullest. But everyone should know their limits and the dangers of being abused by credit.

 

Original photo by Benjamin Lim. Used with permission. 

 

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