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3 Most Important Things Credit-Hungry Singaporeans Should Know

This article was originally on GET.com at: 3 Most Important Things Credit-Hungry Singaporeans Should Know

Are you a millennial between the age of 21 and 29 who has applied for any form of credit last year? The latest report from Credit Bureau Singapore highlighted that consumers in the above-mentioned age group are the hungriest for credit as they formed the largest group of credit applicants in 2016. I must be one of them because I was 24 and I got my first adult credit card last year. To give you a sense of numbers, around 858,000 20-somethings applied for loans and credit cards last year.

The data for Q4 2016 showed that 20-somethings had the most trouble repaying loans, although this group was the least delinquent when it came to paying their credit card bills. I pay my credit card bills through GIRO and you should too if you want to avoid nasty interest fees and late charges. Check out these smart ways to pay your credit card bills on time if you consistently have trouble keeping track of your bills.

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There is absolutely nothing wrong with applying for loans and credit cards, and if you recognise that responsible use of credit cards can help you save money in actual fact. But, it can become a problem when an individual takes on loans and applies for credit lines without fully understanding what he is in for and whether or not he has the ability to finance his loans without being delinquent.

Are you at that stage in life where you are hungry for credit? Read on ahead because we at GET.com will share with you the three things you ought to know so that you can save yourself from falling into financial ruin.

3 Most Important Things Credit-Hungry Singaporeans Should Know

1. Secured Loans vs Unsecured Loans

There are two broad categories of loans - secured and unsecured loans. What's the difference between these two types of loans?

A secured loan is a loan where you as a borrower have to pledge your assets to the lender as collateral for the loan you are applying for. If you don't repay your secured loan, the lender has the right to sell your assets to recoup the money owed. But of course, you'll still have to pay the remaining amount owed if your assets aren't enough to cover whatever amount you owe.

On the other hand, unsecured loans don't require you to provide any assets as collateral for the lender. These types of loans tend to come with higher interest rates. Credit cards are a type of unsecured loan and the interest rates are really high if you haven't already noticed.

Here's a general breakdown of the two types of loans for your perusal:

Image source: MoneySENSE

2. Effective Interest Rates vs Advertised Interest Rates

It is always a good idea to avoid rushing into applying for loans before understanding what the true interest rates you will be paying are. The effective interest rate is the real interest rate that you will have to pay for using that particular loan facility.

It is typically higher than the advertised interest rate, and is usually found in the fine print.

The lower the effective interest rate is, the less interest you'll have to pay, and vice versa. So, do your homework and compare the rates before committing to a loan. Do not ever jump in on a whim just because it 'seems' enticing.

In particular, personal loans are the ones you should really watch out for because nobody wants to be a victim of confusion and rip-offs. Here, you can learn more about effective interest rates and the important things you need to know before getting a personal loan.

3. Consequences Of Defaulting

Just to be clear, a default occurs when the institution that has lent you credit writes off your payment because you couldn't or wouldn't pay up. While that may not sound so bad on the surface, your credit rating will inherently take a beating.

Your credit history, credit facilities, credit repayment record (including bankruptcies, defaults, and even late payments) will be reflected in your credit report.

And when you fail to keep up with repayments, or even worse, default, it can be incredibly difficult for you to apply for credit lines, loans (including home loans), credit cards or any form of credit facility in the future as lenders would be cautious about extending credit to you given your poor credit history. They might even charge you a higher interest rate if they were to grant you loans.

A poor credit rating could be why your credit card applications were rejected. Want to improve your credit score? Doing these will help you boost your credit score.

What do you think? Share your comments with us below!

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