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Watch Out for These Credit Traps
Credit cards have long become a must-have personal finance tool for many of us. From booking an air ticket online to shopping for groceries at a supermarket, credit cards are often used. They have not only provided us with great convenience, but also allowed us to enjoy good savings and rewards on our spending with the many cashback, rebates and rewards schemes that credit card issuers and merchants offer nowadays.
However, despite the numerous benefits, credit cards can become incredibly expensive when they are not utilised properly. It is important to watch out for these credit card traps before you end up racking up a huge debt and hurting your credit score.
Credit Limit Trap
A newly approved credit card usually comes with an extended credit limit that is 2 to 4 times of your monthly income. The ability to swipe more than what you earn is tempting, especially for a fresh graduate who just stepped out into the workforce.
Are you dreaming of that designer watch or bag that costs more than your salary? Just swipe it on your card and leave it to the monthly installment plan to repay the amount. Are you dreaming of your next summer paradise? Just charge it to the card and you can jet off to your dream holiday. Before long, you would find yourself buried in debt as your outstanding balances and interests continue to chalk up more and more.
It is important to remember that your credit limit does not equate to your spending capacity. More often than not, it can be way above your repayment ability. Watch your limit, especially so if you own more than a card. Using up of your credit limit may also make you look like a risky borrower, affecting your credit worthiness.
Minimum Payment Trap
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If you have accumulated a significant amount of balance on your card, say $1000, and a minimum payment amount of $50 is reflected in the statement, it is tempting for many to just make the minimum payment amount and free up their cash for more expenditures.
However, the moment you start rolling over your balance, the rollover amount would be slapped with a high interest, making your purchases more expensive than they should be. Furthermore, if you continue to make the minimum payment only, you would not get a grace period of enjoying 0% interest for your new spending on the card anymore. This means that you will start accruing interest on not only your balance but also your subsequent new purchases daily, resulting in huge balance accumulated on the card as you continue to swipe it.
The payment pattern of whether a full payment has been made for your card monthly is reflected in your credit report too. Hence do not be tempted by the minimum payment amount. Spend within your means and make a full payment for your monthly credit bill.
Hidden Fees and Charges Trap
There are many fees and charges that lie between the fine lines of the terms and conditions when you apply for a credit card. The most commonly known ones are late payment fee, interest charge and annual fee. The late payment fee typically ranges from $60 to $100 nowadays, while interest charge can go up to as high as 29% per annum. It cannot be stressed enough to remember to make your card payment in full and on time to avoid these exorbitant charges.
Annual fee is also another fee which many would know, but tend to overlook upon the card application. It is important to check the fine prints properly upon sign-up to check on whether it comes with an annual fee, how much the fee is and if it is waivable.
With the attractive perks and benefits of cards nowadays, there are increasingly more card offerings which come with an annual fee that is payable upon signup and is strictly non-waivable. For those that offer a no-fee period of up to 1 or 2 years, it is important to note when the period ends so that you can stay alert and look out for the annual fee on your statement. Many tend to forget about the annual fee after the no-fee period, resulting in overdue balance and late fee charges due to the outstanding annual fee.
Be mindful of these credit traps, and a credit card can be a wonderful tool that provides you with great convenience and benefits. If you would like to find out if you have been keeping a good credit record with your cards, you can obtain a copy your credit report from Credit Bureau Singapore at $6.42 per copy.
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