Credit cards are important tools of money management. When used with caution, they can help you reduce your financial burden and get better value for your spending. Although Singaporeans love to use plastic money, many still prefer debit cards over credit cards due to some common myths associated with usage of the former.
Staying away from credit cards altogether is not recommended because if you don’t have a credit history, many lenders might see you as a high-risk customer. CBS and other credit rating agencies also encourage Singaporeans to use cards judiciously because it helps improve the credit score, an important consideration for lenders.
Some of the important factors that affect your credit score are:
Credit-utilisation ratio
Number of accounts operational
Length of each credit
Payment history
Frequency at which new accounts are opened
Knowing these factors will help you understand why the following beliefs are misplaced.
Debunking Credit Card Myths That Hurt You
The following five myths are the most popular that require a close look. Check out the myths and the reasons disproving them:
Having multiple cards can hurt your credit score: This is one of the most common credit card myths floating around Singapore. You can use multiple cards to improve your utilisation ratio. A key to this strategy is to have your credit accounts operational even after you have paid off the debt and stopped using the cards. Credit-utilisation ratio is the amount of credit you have used to the total credit available to you. The more cards you have, the higher will be the value of the denominator in the ratio. Provided you keep your expenditure in control, your ratio would stay low. Some also feel that increasing the credit limit on your card is used as a strategy by issuers to lure you. A responsible user would benefit from it because the ratio would again be lower. Just go ahead and apply for a second card if you haven’t already, provided you have a reasonably good credit score. Just remember not to utilise more than 30% of the credit per cycle on individual cards and credit available to you in whole.
Having a credit card would increase your spending: This depends on you. If you can keep a firm grip on your spending habits, a card will help you get better returns on your spending. Try to pay off the full debt on time every month. This would mean that you’re not paying interest on your card. Moreover, you can continue to earn attractive rewards and benefits on every purchase. Responsible use of your card will actually help you increase your savings.
Interest rates are set in stone: If you have a good payment history, many lenders can make exceptions for you. You will get waivers for longer periods, higher credit limit, and even marked-down interest rates. If you have been a loyal customer for some time, you can even approach the bank to reduce your interest rate, lower or waive off the annual fee on your card or demand more rewards. More often than not, at least some of your demands will be fulfilled.
Maintaining a balance on your card isn’t damaging as long as you’re making the minimum payment: The concept of minimum payment can sometimes be confusing. By making the minimum payment mentioned on your monthly bill, you can simply ensure that you’re not charged a late fee and any interest associated with it. Due to compounding, however, if you’re not paying off the total dues within the interest-free period, the balance remaining on your card will attract interest and show up on the next bill. Hence, you should try to pay up the outstanding balance on your cards without fail. Failing to do so is not good for your credit score either.
Air miles cards are only for the high-income group: If you think that you need to earn S$120,000 or more every year to be eligible for air miles cards in Singapore, you’re mistaken. The truth is that many air miles cards are available for users with an annual income between S$30,000 and S$120,000, especially when they have a good credit history.
Good things can happen with well-judged use of cards. Let it into your life without any more ado. A word of caution, though. Don’t apply for new cards or increase your use of credit if you’re trying to get rid of a huge debt or if you’re going to apply for a major loan like mortgage.
