Most Singaporeans have access to both debit cards and credit cards. Here are the best times to use one or the other.
It’s easy for Singaporeans to get a debit card and credit card.There is a huge difference between the two, and you may be wondering why you want both.
By learning to use debit and credit, you can find an effective financial solution for almost any situation. First, let’s talk about the differences between the two.
What is the Difference Between a Debit Card and Credit Card?
A debit card simply gives you access to your current bank account. When you charge something to your debit card, the money is deducted from your account almost immediately. With debit, you cannot spend more than you currently have in your account.
A credit card, as the name implies, gives you access to loans. When you charge something to a credit card, the issuing bank pays on your behalf. No money is taken from your bank account. You can usually spend between two to four times your monthly income.
It is understood that you will repay the bank, at least up to the minimum sum (usually S$50 or three per cent of the amount owed, whichever is higher), by the end of the billing cycle (usually 27 to 31 days).
Say you have S$500 in your bank account. You want to buy a plane ticket that costs S$1,700. You cannot do this with a debit card, as you do not have enough money.
If you use a credit card, you can purchase the ticket and still have S$500 in your bank account. Your money is not used at all; the bank is paying on your behalf. In 27 to 31 days, you must repay at least S$50 of the S$1,700 you borrowed to buy the ticket.
At SingSaver.com.sg, we recommend you pay the FULL amount, not just the minimum sum of S$50. This is because you will incur high interest rates – about 24 per cent per annum – on the unpaid balance. Check out our Money Mantra podcast for more information about the importance of paying your bill on time.
When Should You Use a Debit Card?
Situations when you should use debit are:
1. You Have Rollover Debt You Need to Pay Off
If you have existing credit card debt (rollover debt), you should refrain from using further credit until you have fully repaid the debt. Do not make a habit of always leaving a balance on your credit card – the high interest rate will overpower any rewards or benefits you gain from the card.
2. You are Providing a Child with a Card
We advise against giving your child access to a credit card, unless (1) it is a student card with a borrowing limit of S$500, or (2) you are supremely confident that your child will not overspend.
Remember that the credit card will allow the bearer access to up to four times your monthly income. There will be a considerable debt to repay, if your child decides to come home with a new Xbox, iPad, and S$3,000 worth of shoes and clothes.
We recommend that young cardholders be given access to only a debit card, linked to their own bank account, until they learn to balance a budget.
3. You Know You Have a Spending Habit
If you have a bad habit of overspending, you may be better off without a credit card. Let a more responsible family member use it, while you stick to using debit. Alternatively, you may want to get a credit card but cap the borrowing limit at less than a month of your income (inquire at the bank).
But you know the limits of your self-control best. If you can’t handle the temptation, don’t get a credit card.
4. Your Debit Card Has More Applicable Rewards
Both debit and credit cards give you reward points and discounts, when you make purchases through them. Sometimes, your credit card will not give you discounts at a particular store, whereas your debit card will.
Check the rewards of your cards online, in order to optimise the benefits.
5. You Don’t Want to Pay Annual Fees
Most credit cards have small annual fees of around S$128 to S$300 per year. Debit cards generally do not have these fees.
However, you can sometimes find credit cards with annual fee waivers as well. Check on SingSaver.com.sg to see which cards are free to hold.
When Should You Use a Credit Card?
Situations when you should use credit include:
1. Trying to Cut Costs via Mode of Payment
Credit cards lower costs when they are used purely as a mode of payment (i.e. you always make your payments in full). This is because credit cards often provide rebates or rewards for every S$1 you charge to it.
Other credit cards give you discounts at restaurants and retail stores when you use them to pay for your purchases. So long as you do not end up paying interest on a rollover debt, you will save money.
You can compare credit cards to find the best rewards and cashback rates on SingSaver.com.sg.
2. Trying to Build a Credit Score
Using and repaying a credit card responsibly will build your credit score. This allows banks to see that you are a responsible borrower. You will have an easier time when you need to take out a major loan, such as for a house, car, or your education.
Conversely, those who never use credit will have a “thin credit file” – they are an unknown risk, and the bank may be willing to lend them less.
We suggest you build a credit score by taking small loans, or using your credit card as a mode of payment, a year or two before taking a major loan.
3. Emergency Cash When Abroad
Some people use a credit card as a source of emergency funds when abroad. This can be more convenient – and cheaper – than having someone send money via Western Union if you run out of funds. To do this, you will have to enable your card for overseas use. In addition, you must be cautious of identity theft or loss of your card.
At home, do not use credit cards as a source of emergency funds. You should have sufficient savings in your account, so that you do not need it. Alternatively, use a personal instalment loan for emergencies, as the interest rate is much lower.
You can compare personal loans at SingSaver.com.sg. Find the cheapest, and note that loan rates can change every month.
4. Making Online Purchases
These days, most websites will accept debit or credit. However, some sites require a credit card, and you will need one to pay. We suggest getting both a MasterCard and a Visa card, as some companies will accept one but not the other.
You can also earn rebates, rewards points, or discounts with the right credit card for online shopping.
5. You Want a Concierge Service
Some credit cards offer a concierge service. You will have access to a dedicated staff, who can help you make last minute travel arrangements or book hotels. This is invaluable if you travel for business. It can also help in getting exclusive deals, such as concerts with limited seats.
American Express credit cards are best known for their concierge services, although some MasterCards and Visa cards have the same function.
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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.