7 Things You Need to Know About Credit Card Instalment Plans

During their September 21 launch, Apple stated that their new iPhone XS Max was one of the most technologically advanced phones it has produced till date.

So, naturally, tech-savvy Singaporeans are itching to get their hands on it. But at S$1,799 for the basic model, it may be a tad bit difficult to afford the phone and be able to live comfortably for the rest of the month.

Which is why, let’s all take a minute and thank god for credit card instalment payment plans, eh? Because with a Citi, OCBC, or DBS/POSB credit card, you can get the iPhone XS Max by paying just around S$150 per month for 12 months. And the interest payable is 0%!

As you can see, credit card instalment plans make large purchases affordable and allow you to stretch your payments. And since this service is provided by all credit card providers in Singapore, it is a great way to split your payments.Or, is it?

Here are 7 things you need to know about credit card instalment plans:

1. The entire amount is deducted from your credit limit

That’s right (started with a shocker didn’t we?)! Let’s assume that you decide to redecorate your home with the latest home theatre system from JBL. It retails for S$899, but you don’t pay the whole amount upfront because you opted for an instalment payment plan!

You then decided to throw a party so that everyone can marvel at your new buy. And, since you went all out, you ended up using your credit card to pay for the gourmet food you ordered. Again, thanks to instalment plans you don’t have to pay the total of S$2,000 at once!

Then you see that your credit limit has been reduced by S$2,899 (the cost of your home theatre systemand gourmet food).

This isn’t a mistake. While your credit limit will gradually return to its original amount as and when you make payments, the entire amount you have spent is deducted from your credit card. Because of this, you may be inconvenienced for the first few months, since your credit limit is lower than usual.

 

2. You don’t earn rewards

If you have a credit card that lets you earn 2 points for every S$1 that you spend, making a big-ticket purchase of S$6,000 means that you earn 12,000 points, right?Not quite.

You see, purchases that are converted to instalment plans do not earn any rewards. Banks state that the cost involved in allowing you to make payments in instalments makes it difficult for them to reward your spends.

Currently, the OCBC Cashflo Credit Card is one of the very few cards that allows you to convert your purchases into instalments and also earn rewards on those transactions. If you spend S$1,000 or more with the card, you can split the amount into monthly instalments for 6 months and earn 1% cash rebate on your monthly bill. It isn’t a great rebate amount, but it still is something.

 

3. 0% interest doesn’t mean that the instalment planis free

Zero really is a magic number when it comes to how much you need to pay. And banks know this. This is why they make sure that all their communication carries “0% interest instalment plans”.

Banks, however, are in the business of making money. So, while it may be 0% interest, the fine print will tell you that you need to pay a processing fee or a one-time administrative fee. These fees can range anywhere from 3% to 6% of the amount that you plan to convert, and are also based on the payment tenure you choose.

The fee rate also depends on the merchant you decide to shop from. You see, each bank has a list of participating merchants who provide 0% interest instalment payment plans. If you plan on converting into instalments a purchase made from a non-participating merchant, you will have to pay a higher processing fee.

And this is just one of the fees that you are charged. Read on for the rest.

 

4. Other fees and charges you may have to pay

Yes, there are other fees that you end up paying. These include:

• An early repayment fee if you wish to pay the remaining amount in full before tenure completion. This amount varies from bank to bank. For instance, POSB’s early repayment fee is S$150.

• An administrative fee if you wish to change the tenure of your instalment payment plan.

• A late fee if you miss out on monthly payments. This is over and above the interest you will be charged on your card’s outstanding balance.

 

5. Forget about cancelling your card

Many people end up cancelling their credit card if they find that they aren’t able to get a waiver on the annual fee.

If, however, you have an instalment payment plan running, you won’t be able to do so. Unless you are willing to pay the remaining amount in full and pay the fees and charges associated with early repayment and termination of the plan.

If you don’t want to pay these fees, you will have to either request for an annual fee waiver (and hope you get it) or cough up the annual fee.

Moreover, an instalment payment plan also means that you can’t use any bank’s balance transfer service until all of your instalments have been paid.

 

6. You have to pay even if you are unhappy with the product

Let’s assume that you decide to buy an annual membership at an exclusive gym with your credit card and spread the membership amount across 2 years with an instalment payment plan. And 6 months later the gym decided to shut shop.

Would you still have to make instalment payments for a membership you can no longer use?

Yes, you have to. And that is the unfortunate truth.

The same goes for products. If you are unhappy with a product, you will have to take it up with the merchant and not the bank. Until the merchant and you have reached a consensus, you will have to continue making instalment payments on the product.

 

7. It could affect the approval of your home loan

Home loans for private properties or Housing and Development Board (HDB) flats are subject to a regulatory framework known as the Total Debt Servicing Ratio (TDSR).

According to this framework, your monthly payment obligations cannot exceed 60% of your monthly income. This includes the outstanding balance on your credit card as well.

What does this mean? Well, let’s say, that you have converted a S$6,000 charge to your card into 12-month instalments, paying S$500 per month. Essentially, your monthly payment obligation is S$500 per month with respect to this particular credit card.

When you apply for a loan, however, it isn’t S$500 that is taken into consideration when calculating the TDSR, but the entire outstanding balance (which is S$6,000 in this case). Add this amount to other monthly payments and it could adversely affect the approval of your home loan application.

 

So, when should you consider an instalment payment plan?

After reading this you may think that there really isn’t any good reason to apply for an instalment payment plan. But that’s not true. You should consider a credit card instalment payment plan if:

• The product you plan to buy is a necessity: If you need to buy work equipment that costs around S$1,500 and you have only S$900 as savings, using an instalment payment plan makes sense. This way you will be paying a little amount each month and won’t wipe out your savings.

• You aren’t paying for a product or service in advance: As seen in the gym membership example, paying in advance for a service could end up adversely affecting you. The same goes for big-ticket products. If you pay for a product and it isn’t delivered or the store you buy it from closes down, you still have to pay the monthly instalment.

The bottom line is that credit card instalment payment plans make big-ticket purchases affordable and are a great option if you ensure that you pay your instalments on time. But if used often they can make you believe that you are managing your finances well, lulling you into a false sense of confidence.

So, before you decide to convert a transaction into instalments, stop and think if the product is something you really need.After all, if your current phone works well, there really isn’t any need to get the iPhone XS Max right now, is there? Even with a 0% interest instalment plan!

This article was written by BankBazaar.sg.

BankBazaar.sg is a leading online marketplace in Singapore that helps consumers compare and apply for financial products such as credit cards and personal loans.

(By BankBazaar.SG)

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