Credit card traps are everywhere, credit cards have become an integral part of everyday modern life. Especially in this digital age where contactless and mobile transactions are the way to go, it is uncommon to find a peer without a credit card in his or her wallet.
Image 1: Credit card Spending, Pixabay
However, the growing trend of credit cards usage also means that more and more people are susceptible to credit activity.
Want to buy a $15,000 watch but barely have enough sitting in the bank account? No problem, just sign up for the 0% interest 12 months instalment plan on the card and one could easily own the watch.
Eyeing on the dream Europe vacation? Just swipe your card, and you can jet off to your dream holiday.
Before long, you would find your total outstanding balance and interest accumulated on the credit cards snowballing, and you would have a hard time repaying the debt.
The way that one can easily slip into massive amounts of credit card debt is similar to falling into a trap. It is important to manage and prevent accumulation of credit card debt.
Because having a bad mark regarding poor payment or default would significantly impact your credit score. Also, it affects your bigger financial goals such as owning your dream house. For example, a default record stays on your credit report for three years even after a full repayment!
Here are three ways which can prevent you from falling into the credit card trap.
1. Know the real costs of “rolling over”
Revolving or rolling over a balance may require more interest than you think. There is usually an interest-free grace period of 25 to 30 days at the end of your billing cycle before payment is due.
Many would know that if you were only to make the minimum payment, the rollover amount would be slapped with an interest of as high as 26% per annum. What’s worse, if you miss the payment, a penalty fee of $60 to $100 or even more will be imposed on top of the interest.
Above all, what many people overlook is regular revolving payment will lose them the grace period for their card spending.
It means that you will start accruing interest on not only your balance but also on your new purchases daily after the due date, resulting in a large balance accumulated on the card as you continue to use it.
Now that you know the real cost involved in rolling over the balance make the full payment for your card as much as possible. That will also help you maintain a proper utilisation pattern for your card and contribute to a good credit score.
2. Build an emergency fund
Set a ‘safety cushion’ equivalent to about two to three months of income. No one knows when an unexpected event such as job loss or illnesses will hit. When that happens, your income stream stops but you will still have to pay the bills.
An emergency fund can tide you over an unplanned period of unemployment, especially if you had chalked up a significant sum of credit card balance when you were still healthily employed.
It also ensures that you do not have to resort to using credit cards or cash advance loans to settle your monthly expenses or everyday bills, mounting to a credit debt.
Setting up a ‘safe cushion’ is worth doing even if you are paying off a mortgage. However, if you have got a high-interest debt such as outstanding credit cards or cash advance balances, pay off these debts first before setting aside money to save up.
3. Reduce the credit limit
You should spend less than you earn. Yes, the credit limit of that newly approved credit card may look tempting, especially for a fresh graduate who just stepped out into the workforce.
For those who are already holding several credit cards from different issuers, the total credit limit added up from all your cards may well exceed four to eight times of your monthly income.
However, your credit limit does not equate to your spending capacity. More often than not, it can be way above your ability of repayment. Reassess your current finances before you use up your credit limits to swipe for that dream watch or vacation.
Do you have a steady job? What are your monthly expenses? Swipe up to the amount which you are confident of paying off in full, and not just aim at making the minimum payment.
Control and cut your credit limit if you find it hard to exert self-discipline and limit your spending on the cards. Notify the banks to adjust and reduce your credit limit to an amount that is within your means to spend and repay.
In that way, you can still enjoy the perks and benefits of your cards without worrying about burying yourself in debt.
Ultimately credit card spending which is not repaid in full each month will impact your Home Loan Borrowing ability which could impact your Property Buying or simply by refinancing to a cheaper home loan package.
Be a master and not a slave to your cards. A little planning and a little control will go a long way to keep you out of debt and help you build a good credit to achieve your financial goals.
If you would like to find out if you have been keeping a good credit with your cards, you can check your credit score by obtaining a credit report from Credit Bureau Singapore at $6.42 per copy.