It’s easy for Singaporean students to get credit cards. But overspending on it has serious long-term consequences.
Student credit cards in Singapore are becoming increasingly common, and that’s a welcome thing – if students use them correctly.
What’s worrying however, is the number of students who are, shall we say, liberal in making repayments. The small amounts involved, coupled with the ease of using the cards, are driving some to pay late or default on loans.
Here’s what every Singaporean student should know before messing around with a credit card:
What is a Student Credit Card?
The term “student credit card” generally refers to a card with a $500 credit limit. There is often no minimum income required to qualify for this card. An example would be the DBS Live Fresh card.
Apart from the low credit ceiling and ease of application, there is not much difference between a student credit card, and a regular credit card. You still get the usual rewards and discounts, and you can still take the dangerous step of using the card for loans (we explain more on this below.)
Some students assume that, because the amounts involved are small, they can pay late or even default. Please don’t join their ranks, as there are serious consequences:
Reason #1: The Interest Keeps Accumulating
Many students are under the impression that, because the credit ceiling is $500, the maximum possible debt is low. But a student credit card has an interest rate just like a normal credit card.
Say you owe $500 on the card, which you ignore paying for the entirety of your time in University. You finally decide to address the bill four years later, by which time your credit score (see below) could be irreparably damaged. At an interest rate of 24 per cent per annum, your $500 debt would require a repayment of around $1,182, not inclusive of late fees, annual fees, etc.
If you have applied for two or three student cards and don’t pay any of them, you are looking at a hefty $3,000 to $4,000 in unpaid debt by the end of University.
Reason #2: Delay Payments Long Enough, and You’ll Destroy Your Credit Rating
If the bank decides they’re tired of waiting, they could write off your debt. This means they treat what you owe them as an irrecoverable loss, and stop demanding it back. This is not as great as it sounds.
When you default on a credit card debt, it appears on your credit score indefinitely. This is the report from the Credit Bureau of Singapore (CBS), which banks can pull up and check when you apply for a loan. If you have defaulted before, banks can either reject your loan application, or loan you a much smaller amount.
The same thing can happen if you pay late. If you consistently fail to pay at least the minimum amount (usually $50) each billing cycle, your credit rating will fall. Note that a credit rating of B or C is already considered delinquent, and will lower the amount banks are willing to lend you.
Consider how this could affect you, 10 or 15 years down the road when you want to buy a house. Most people can borrow up to 80 per cent of their home value, when applying for a mortgage. On a $800,000 condo, this means they can borrow up to $640,000. They’d need a down payment of about $160,000.
But if you have a low credit score, or record of a default, the bank may only be willing to lend you 60 or 70 per cent, instead of the full amount. At 60 per cent, it means you’d need a whopping down payment of $320,000 to buy a house. All because you paid credit cards late, or defaulted on them. Don’t let this happen to you.
(This also applies for public housing. HDB checks your creditworthiness before giving you a HDB Concessionary Loan as well!)
Reason #3: It Can Affect Your Job Prospects
Employers cannot check your credit score, but they can request to see it. Some employers are hesitant to pick candidates who have defaults in their credit score; it is taken as a sign of irresponsible behaviour. In industries that require a high degree of trust, such as law and finance, having a default or low credit score is a major blemish.
Few banks, for example, would hire someone who seems to have problems with basic financial management.
Reason #4: It May Be the Last Credit Card You’ll Get
It is difficult to apply for credit cards if you have a bad credit score. If you have defaulted on a credit card, even if it’s just a student card, getting another one can be almost impossible. Banks are not inclined to repeat their mistakes.
There is a real possibility that, if you default on a student card, it will be the last credit card you are ever given. You will be unable to get the discounts, cashback, air miles, etc. that come from credit cards ever again.
The Student Credit Card is Not a Loans Device
Why is the interest rate on a student card so high? That’s simple: you are supposed to pay it back after using it. You are not meant to use it a form of loan.
If you do need to borrow money, ask your parents or look up personal instalment loans – you can find some affordable ones like HSBC’s Personal Loan at SingSaver.com.sg. Never borrow money through a credit card, or a moneylender as the interest rate will be exorbitant.
Pay through your credit card; don’t pay with credit.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.