Far from being risky, credit cards are convenient and beneficial. Here are 5 reasons why.
Thanks to movies and cautionary tales, credit cards have developed a reputation as being dangerous. In reality, credit cards are a useful tool that can save you money, if you use them responsibly.
Here are five ways that credit cards are nowhere near as dangerous as many people seem to think:
1. When Used Correctly, the Interest Rate on a Credit Card is Effectively Zero
There’s no way your credit card debt can go out of control, if you make sure to pay it back in full. Credit cards do have a high interest rate (approximately 26 per cent per annum) – but the interest rate is only applied to any leftover debt, at the end of the billing cycle.
If you repay the full amount, the leftover debt is S$0. It doesn’t matter what the interest rate is, as any percentage of zero is still zero. In fact, this is how most responsible people use credit cards – they only use the card as a mode of payment, and they never spend more than they can pay back at the end of the billing cycle.
2. You Can Control the Credit Limit on Any Credit Card
Most credit cards allow you to charge up to four times your monthly income. If this is a large sum that makes you nervous, don’t worry about it – all you need to do is lower the limit.
You can call the bank, and set the limit to as low as S$1,000 (although setting it to half your monthly income is already quite prudent). This ensures you’ll never go overboard, and spend money that you don’t have.
It also means that you can give a credit card to someone else (such as your daughter), without fear that they will overspend. There are even student credit cards, with limits as low as S$500.
3. The Liability Limit is S$100, if You Suffer Identity Theft
If you suffer identity theft without your physical card being involved, and you were not negligent, your liability is quite low. Under the guidelines set by the Associated Banks of Singapore (ABS), you shouldn’t be liable for more than S$100, even in the rare chance your card is stolen.
Credit cards also come with two-factor authentication these days. You can receive alerts whenever the card is used, and the user would need access to a special one-time password (OTP) to complete the transaction (the OTP will be sent to your phone, so they can’t use your card unless they have that too).
And should you lose the physical card, you can call your bank 24/7 to immediately suspend it. This will immediately prevent its use by anyone else.
4. It’s Very Unlikely that Your House and Stuff can be Carted Away
Credit cards are a form of unsecured loan. That is, there’s no collateral, and nothing can really be seized if you don’t pay up. The main damage is to your credit score – you will have difficulty with getting loans in the future, if you always pay late or not at all (a situation known as a default).
Even before things get that far, banks will normally be amenable to restructuring your loan. This could involve lowering your interest rate, or freezing your credit while giving you an interest-free grace period to repay your debts. Banks also offer a Debt Consolidation Plan (DCP), which allows you to consolidate all your debts into a single, fixed-repayment loan. (But you’ll have to first owe 12 times your monthly income in unsecured debt before qualifying for one – not a good situation to be in!)
If you’re in deep credit card debt, do speak to a credit counsellor about this service.
Banks can sue you for failing to repay them. However, the movie-type scenes in which they seize your house and belongings generally doesn’t happen (that’s the consequence of failing to repay secured loans, such as a home loan).
5. Made a Mistake? Don’t Fret; It’s Easy to Lower the Interest on Credit Card Debt
So you made a mistake, and missed the billing cycle. Don’t panic, there’s still no need to pay 26 per cent interest. Simply take a cheap personal loan (one that’s at around six per cent interest or less), and pay off the credit card debt with it. Then, close the credit card account (so you can’t be tempted to use it again).
This way, you would effectively transform the 26 per cent per annum debt, into one that’s just six per cent per annum. This can be done in a matter of minutes – just check SingSaver for the cheapest possible personal loan, and use it to erase your card debt.
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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.