Ravi Chandran
If used responsibly, credit cards are a great emergency loan source but can cause undue hardship to those who are not aware of the costs.
They are not considered to be sources of longer-term financing. However, they can be a great emergency loan source for those who need money quickly and intend to repay the borrowed amount in short order.
If an individual needs to borrow a small amount of money for a short period, a credit card (or a cash advance on a credit card) may not be a bad idea, and may be a great emergency loan source. After all, there are no application fees (assuming you already have a card).
For those who pay off their entire balance at the end of every month, credit cards are a great emergency loan source, and can be a source of 0% financing.
On the flip side, if a balance is carried over, credit cards can carry exorbitant interest rate charges (often in excess of 24% annually). Credit card companies will usually only lend or extend a small amount of money or credit to the individual. In other words, credit card companies typically don’t make mortgages, which can be a disadvantage for those that need longer-term financing or for those that wish to make an exceptionally large purchase (such as a new car). Borrowing too much money through credit cards could reduce your chances of getting loans or additional credit from other lending institutions.
Credit cards can be both a boon as a great emergency loan source, as well as a bane as a debt trap.
If you’re strapped for cash and really want to make that purchase, you can charge it and pay it off later. And if you have a rewards card, it may be even better because you can collect points or cash back. But, if you’re prone to carrying a balance, you’ll have to wait longer to pay it off because of the hefty interest that some companies charge.
Carrying a balance on your card can be very costly. Pay off your credit card balance entirely. With the astronomical interest rates that credit card companies charge, it simply does not make sense, if you have savings elsewhere, to carry a balance. If you can’t completely pay off your balance, at least increase your monthly payment, even a little bit. It will be more profitable in the long run.
If you get a credit card, you should plan to pay the full amount owed every month. That way you avoid the exorbitant interest rates the cards charge, and you also benefit from the grace period (which in effect enables you to borrow money for a few weeks for free).
In order to accomplish this, determine how much you’re able to pay on your credit card bill each month and then stick to that limit. At the end of the month, pay the full amount, just as if it were any other bill, like rent or utilities. Also, examine each monthly statement to make sure there are no inaccuracies or fraudulent activity, and report anything you find immediately.
If you usually pay the balance in full but are going to be late with one payment, call the credit card company and find out how much you will be charged as a penalty. Include that amount in your check, so that the fee doesn’t appear as a balance on the following bill, which would eliminate the grace period and result in more interest charges.
If you expect to have difficulty paying off the bill every month, consider using a debit card (which draws from your bank account) or an American Express card (which doesn’t allow you to carry a balance from one month to the next). Remember that if you have credit card debt, you’re really borrowing from your future earnings, which is a bad habit to get into.
If you have too much credit card debt, don’t expect a quick fix.
Applicants of credit cards will in most instances need to be above 21 years, earn a gross annual income of S$30,000 if they are Singaporeans, or S$45,000 if they are foreigners. Fighting your way out of debt takes time and perseverance. You should do it as quickly as you can, but understand that you’re fighting an uphill battle that might take some time.
