With easier access to credit and the immediate gratification culture of “Buying Now, Pay Later”, many have found themselves caught in a cycle of credit card debt. Our statistics have shown that the highest consumer delinquency rate for unsecured credit cards (including $500 credit limit cards) stands at 6.4 per cent in June this year for people ages 40 to 44. Delinquency, also known as late credit card payment, refers to debt that is owed 30 days or more past the due date.
Individuals are beginning to max out their credit limits and use debt to pay off debt. Debt that initially seems manageable for payoff could rapidly snowball because of compounding interest. It is thus important to have a good sense of what we earn versus what we can spend on. Here are 3 credit traps to avoid that could possibly lead you into a downward spiral if credit is not used wisely.
1. The Needs from Wants trap
Many Singaporeans tend to incur excess credit card debt through overspending because of their inability to tell needs from wants. Take a general example – food. We are eating out more often than before and as a result, leading to an increase in spending. We tend to indulge in good hearty buffets at high-end restaurants, eating a lot more than what we actually “need”. Having a lifestyle of paying more for the convenience and fun of dining out should be curbed. It may be easier to eat out after a long work day but it is more expensive. Scale down if your lifestyle is beyond your affordability and be realistic about needs versus wants. You will find yourself with a lot more savings each month and avoid a potential debt trap.
2. The Minimum Payment trap
The words “minimum payment” can be confusing for new credit cardholders, who might think that that is all they owe each month. Your credit card bill is not paid off until it is paid off in full. Many Singaporeans believe that by paying their minimum balance of the total bill monthly, they will not owe any interest accrued on the remaining balance. This can result in an endless cycle of outstanding credit card debt that never gets resolved. Not only will you never pay off your bill, but the total interest you will pay will be much higher and your payback time frame will get a lot longer.
Lenders like to see plenty of breathing room between the amount of debt reported on your credit cards and your total credit limits. The more debt you pay off, the wider that gap and the better your creditworthiness. When you pay the full balance on your bill each month, you are taking advantage of an interest-free loan from the card issuer. If you make only the minimum payment on a significant balance, it can take years to pay off the full debt. This information will be recorded in your credit report under the Account Status History section. As most lenders will check your credit file to assess your creditworthiness prior to making a decision, a good credit repayment history will make it easier for you to obtain credit and to qualify for loans.
3. The Hidden Fees trap
Read the fine prints carefully on credit cards for charges related to balance transfers, annual fees, late-payment fees, replacement card fees and foreign transaction fees. Always read the fine print and understand the credit card’s terms and conditions. What is the interest rate per annum? Are there annual fees attached? Is there a different interest rate for cash advances? Valuable information in the fine prints can help you to make the best choice. Get the answers before you settle on a card.
The benefits of living debt-free far outweigh the stifling effect of a credit trap. Take control of your finances. Change your bad financial habits. It is your choice to make. Always plan for affordability and not desirability. This will enable you to stretch your dollar further when you are realistic about how much money you have in the first place.
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