Most of us carry more than one credit card as they offer various benefits and discounts. However, surveys have shown that people generally lack the knowledge of how to make better use of these cards and stretch their plastic to reap more rewards and benefits.
This is understandable. The number of cards in the market is mind-blowing. Over the years, ever more have been launched to cater to different target segments and customer needs. And card issuers are constantly changing their terms and conditions.
It is prudent that we update our knowledge on what is available in the market - to get the very best out of these cards.
Card holders who misuse their cards may end up paying a high price, particularly when they chalk up significant bills resulting in serious debt and even bankruptcy in some cases.
But it need not be the case.
When we understand how to use credit cards smartly, they can become savings tools and a means to getting freebies such as meals, air tickets and hotel stays. For instance, you are more likely to get special offers on items such as abalone during this festive Chinese New Year season with your card spend.
Here are seven myths surrounding credit cards and the facts.
MYTH 1: ONE SHOULD JUST USE ONE CREDIT CARD
Many people believe that managing multiple cards is quite a hassle, and some even think that having more cards will hurt their credit score, said MoneySmart's chief executive Vinod Nair.
FACT: NOT ALL CARDS ARE CREATED EQUAL
As various cards benefit different lifestyle spending habits, Mr Nair advises that one card could be for savings on family expenditure such as cashback on groceries and petrol, and another card to accrue miles on business travel or for purchases of big-ticket items.
Mr Vincent Tan, OCBC Bank's head of credit cards, said: "Make the different cards work hard for you in seeking out benefits. No single card can give you all the benefits."
MYTH 2: MAKING THE MINIMUM PAYMENT IS ENOUGH
Credit card issuers will typically require a minimum payment each month. This is about 3-5 per cent of your outstanding balance or a certain amount like $50, whichever is greater. It has been reported that one in five Singaporeans makes only the minimum payments on his credit card bills and rolls the rest over to the next month. This is not prudent.
Mr Nair said many people do not realise how credit card debt can escalate quite quickly, owing to compounding interest.
"Without paying your bills in full, you get charged interest on the outstanding balance, and if you don't pay that off, you get charged interest again on top of that the next month," he cautioned.
FACT: MAKING ONLY THE MINIMUM PAYMENT IS WHAT LEADS TO CREDIT CARD DEBT
Credit card interest rates apply to any outstanding balance at the end of each billing cycle. Let's say a card member owes $5,000 on a credit card with an annual interest of 28 per cent and a minimum repayment of $150.
Mr Rohith Murthy, managing director of SingSaver.com.sg worked out that if only $150 is paid every month, it would take the card member 51/2 years to pay off the full amount. In the process, the card member would also accumulate $4,782 in interest, bringing the total amount repaid to $9,782.
So, financial experts' advice is to pay as much as possible to reduce interest, and where possible, pay the full amount at once.
"As long as you maintain discipline in paying your credit card bills on time, you will not have to pay interest. You can also opt to lower your credit limit to control your spending," said Ms Choo Wan Sim, UOB's head of cards and payments, Singapore. She added that your credit score will be affected only if you do not pay your bills in full and on time.
MYTH 3: CREDIT CARD 0% INSTALMENT PLANS ARE FREE
Credit card instalment plans make big-ticket items more affordable by splitting up the price into six- or 12-month fixed instalments, at 0 per cent interest. This is useful if a major purchase is needed, but cannot be repaid in full by the due date.
FACT: THERE ARE PROCESSING AND CANCELLATION FEES
Before the instalment plan kicks in, card members need to pay a processing fee ranging from 1.5 per cent to 5 per cent. The fees vary according to the amount charged and the length of the instalment plan.
"Before signing on to the instalment plan, card members must read the terms to find out what the fees are. While instalment plans can be stopped any time, an administration fee ranging from $100 to $150 will be charged for repaying the amount early, cancelling the plan, or cancelling the card," said Mr Murthy. "If the plan or the card is cancelled, card members need to pay the remaining balance or purchase price in full."
The instalment plan is only interest-free if it is paid in full and on time. He added that if a card member skips a payment, there will be finance charges, late payment charges, and interest imposed on the outstanding amount. As such, instalment plans must be treated as a fixed cost and card holders must make sure to budget around each monthly payment.
MYTH 4: IT'S CHEAPER TO CHOOSE TO PAY IN SINGAPORE DOLLAR FOR FOREIGN CURRENCY PURCHASES
If you are making a foreign currency purchase - whether while travelling or making an online purchase with a store based overseas - you will sometimes get the option of paying in Singdollars (SGD) or in their local currency.
FACT: PAYING IN THE LOCAL CURRENCY IS MORE FAVOURABLE
Where possible, you should always try to choose to pay in the local currency. For example, if you are asked by a US-based store whether you wish to pay in US dollars (USD) or SGD, you should choose USD as the charges would be lower. This is because if you have chosen to pay in SGD, the exchange rate used in such situations is set by the merchant and is usually not favourable, said Mr Anthony Seow, DBS Bank's head of cards and unsecured loans.
MYTH 5: USING CREDIT CARDS FOR ONLINE SHOPPING OR WHEN TRAVELLING IS NOT SAFE
FACT: RISKS ARE LOWERED WITH SECURE SYSTEMS
For e-commerce, many online merchants have implemented 3D secure systems that require payments to be verified by a one-time password (OTP) sent to a customer's registered mobile phone. This lowers the risk of unauthorised transactions.
Customers can also choose to set SMS transaction alerts on e-commerce or overseas transactions so that they are notified promptly of any transactions on their card.
Mr Seow said: "Paying with your credit card when travelling also reduces the risk associated with carrying large amounts of cash. In the event where your wallet gets lost or stolen, your credit cards can be immediately blocked as soon as the bank is notified, which helps to safeguard any further losses."
In addition, customers can dispute unauthorised transactions with the bank which will then perform a chargeback on the transactions.
MYTH 6: YOU CAN LOSE YOUR HOME IF YOU CAN'T PAY YOUR CREDIT CARD
Many Singaporeans tend to imagine the worst especially in cases where they cannot meet their card's minimum payment. One of these concerns is that their home might be possessed by the bank if they are unable to make payments.
FACT: CREDIT CARDS ARE UNSECURED LOANS AND DON'T REQUIRE COLLATERAL
Most credit card holders never get to the point of default (this is when the bank writes off a debt as an unrecoverable loss), noted Mr Murthy.
But even in the improbable situation that it happens, a credit card is an unsecured loan.
"Unlike a home loan or car loan (these are secured loans), there is no collateral involved. Card members do not have to pledge their home, car, or other assets to back their credit card debt. The bank is taking on a risk and trusting card members when they issue the card. This is why credit card interest rates are so high," he said.
MYTH 7: PAYING THE ANNUAL FEE IS A WASTE OF MONEY
Many card members have a habit of requesting an annual fee waiver. And such requests are usually granted by the banks with some even automating the waivers upon request.
FACT: REAP MORE REWARDS WITH ANNUAL FEES
There are many cards now, especially air miles cards, that use the annual fee payment as a means to reward customers further.
Mr Nair said: "For instance, you might get bonus miles if you pay the annual fee, and this might work out to be a better deal than not paying the fee at all."
His tip is to figure out what you are getting in return, and if you aren't getting anything, then a simple call to waive the annual fee is possible if you have been spending on the card regularly.