Credit cards are convenient and rewarding, but only if you use them correctly. Here are 7 things millennials need to know about credit cards.
Millennials are at an age where they can get credit card, but may not have had access to so much money before.
That makes for some strange reactions – some go on wild spending sprees, while others are terrified of words like “credit”.
Here’s what all 20-something millennials should know, before they get that piece of plastic.
1. Not Using any Credit Doesn’t Mean You Have a Good Credit Score
Some millennials believe that, if they never use a loan, they’ll have a good credit score when they need it. That’s incorrect.
If you’ve never used any loans before, then the bank has no idea how reliable you are. Your credit report will show a “thin credit file”, which means there’s no real way to gauge how much they can safely lend you. As such, you might actually find it harder to get a major loan later, if you have zero history of loans.
A simple way to fix this is to use a credit card as a mode of payment. Buy through the credit card, then pay it back immediately. This way there’s no “real” debt as you’re not truly borrowing any money, but your credit score will show you have a perfect record of repayment anyway.
2. Credit Cards Must be Repaid at the End of the Billing Cycle, Not the Month
Credit cards have “billing cycles”, which range from 27 to 34 days. You need to make repayment before the end of this billing cycle, if you want to avoid interest or late fees; but note that the billing cycle may not be at the end of the month.
For example, if you start using a card on the 20th of October, and the billing cycle is 27 days, the payment may be due on the 16th of November; not at the “end of the month” in October.
This is why it’s best to hold only three credit cards as most – you don’t want to get confused between all the different billing cycles.
3. Credit Card “Installment Plans” Don’t Mean the Card is Charged Every Month
Say you buy a S$1,800 laptop, on a 12-month installment plan. How much is charged to your credit card?
The wrong answer is S$150 a month.
When you use a credit card installment plan, the amount isn’t charged to your card once a month. Rather, the entire sum (S$1,800) is immediately charged to the card. It’s up to you to make monthly repayments, failing which the usual interest rate (around 26 per cent per annum) will apply.
This is why you should only buy physical items, such as laptops and televisions, on the installment plan. If you buy a service, such as a gym package, you’ll be stuck making repayments even if the gym closes down abruptly.
4. You’re Not Supposed to Let Someone Else Use Your Credit Card
Your partner, sibling, parent, etc. can probably get away with using your credit card, and signing off on it. However, this is technically illegal. You’re supposed to get a supplementary card, if you want someone else to be able to use it.
In theory, the merchant receiving your card is supposed to destroy it, even if it’s your brother or mum using it with your permission. You can also cause yourself a major inconvenience, if the store decides to call the police on your teen brother using your card (they might suspect identity theft).
To avoid serious inconvenience, such as having to apply for a new card and reopen your account, use a proper supplementary card.
5. Credit Cards are Not for Borrowing Money (That’s What Personal Loans are for)
Credit cards provide convenience, and savings through cashback and reward points. They are meant to be a convenient mode of payment, not an actual source of loans.
If you need to borrow money, a personal loan provides interest rates of just six to nine per cent per annum (the interest may even be zero per cent, if you can repay it all in six months). However, a credit card has an interest rate of 26 per cent per annum. It’s much more expensive, and should never be used in place of a personal loan.
Don’t rely on your credit card to borrow money, just out of laziness! Compare all available loan options, and pick the cheapest. It’s free to do on SingSaver.com.
6. It’s Not “Free” to Have a Credit Card (Even if You Don’t Use it)
Not at all. Credit cards have annual fees, which vary between the banks and card companies. This is often around S$120 to S$150 a year.
Some credit cards really are free, and don’t charge annual fees at all. Some credit cards come with a fee waiver, if you actively use the card (e.g. if you charge a certain amount to it, you can call the bank and they may approve a fee waiver).
Some credit cards, typically those from American Express, will never waive their fees – but this is because of the depth of service provided (some American Express cards, for example, come with concierge services that can book flights for you, or get restaurant reservations).
If you have a credit card that you’re not using, close the account. Don’t just leave it in your wallet, to pointlessly accrue annual fees.
7. You Can’t Always Hoard Your Credit Card Points Over Several Years
Some credit cards have points that expire within three to five years. Some credit cards have points that never expire. You need to check the terms and conditions, to understand how the points system works.
Note that this is the same with air miles – some cards will take away your accrued air miles, if they aren’t used within a given time frame.
Never assume that you have years upon years to hoard your points. Few things are more painful than accumulating enough reward points for an air ticket to Europe, and then seeing it all disappear because it expire just before you make the claim.
Either get a card with points that don’t expire, or check your credit rewards regularly.
Ready to Check it Out Yourself?
We can write as many cautionary articles as you can be bothered to read, but the truth is, you’ll really only understand how credit cards work when you start using them yourself. So are you ready to get into credit cards? You’re in luck!
We’re kicking off 2018 with a special spotlight on Millennials and their needs, and we’ve rounded up the credit cards with lifestyle perks we think you will love. Stay tuned to January 8th, 2018 for more information!
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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.