A credit card instalment plan lets you spread payments for 12 to 24 months, at 0% interest. But you shouldn't use it to buy just anything.
Many retail stores in Singapore come with an option to use a credit card instalment plan. This is often a 12 to 24-month interest-free plan, which comes with buying big ticket items like furniture, gadgets, and so forth.
Before jumping on the deal however, read the fine print of your credit card’s instalment plan. Here’s how to decide when to put a purchase on instalment, and when to pay it in full.
How Does a Credit Card Instalment Plan Work?
Before using the credit card instalment plan, you should understand how you’re billed for it. As an example, let’s say you take an interest-free plan for a S$3,000 TV, which is paid in 12 instalments of $250.
What would your minimum monthly repayment be?
The answer is still S$50, or 3% to 5% of the amount owed (whichever is higher). However, if you pay only this minimum, then you haven’t made the instalment payments. Often, the amount owed (the S$3,000) can then be rolled into your usual credit card bill, and you will be charged 24% per annum on this amount. It is no longer interest-free.
This practice varies between banks, but you must be aware of the general principle. If you take the interest free instalment loan, you must repay the instalments in full. You need to do this even if your minimum repayment hasn’t changed, otherwise the deal becomes different.
Now, you can consider using the instalment plan if:
- You are alright with reaching the credit ceiling
- You are not pre-paying for a service or undelivered product
- You are buying a big-ticket necessity
- You are not applying for a mortgage or HDB loan during the instalment period
1. You Are Alright with Reaching the Credit Ceiling
When you use the instalment option, the entire sum is immediately charged to the card.
For example, if you purchase a S$3,000+ MacBook in 24-month instalments of S$125, the charge to your card will not be S$125 each month. The full S$3,000 is charged immediately.
This could mean reaching your card’s credit ceiling, so you will be unable to use it later on (until you’ve paid down some of the debt). Likewise, if you find that your card is declined for the instalment plan, it is because you need to pay down your card before you can charge more to it.
2. You Are Not Pre-Paying for a Service or Undelivered Product
Because the full amount is immediately charged to the card, it is dangerous to use instalment plans for prepayment.
For example, say you use a 24-month instalment plan, to buy a gym package for S$5,000. Six months down the road, the spa closes. You will still be liable to pay the remaining instalments, as your bank already paid the full sum for the package. The fact that the gym closed down is not really their fault.
The same goes for undelivered products. If you purchase a S$10,000 sofa on a 12-month instalment plan, and the furniture store closes before delivering it, you will still be saddled with the instalments.
For this reason, we strongly advise against prepayment of any sort when you’re using a credit card instalment plan. Use it only for goods and services that you will receive in full, on the spot.
3. You Are Buying a Big-Ticket Necessity
We advise you to always repay your credit card in full, and use the instalment plan as a truly last resort. One such situation is when a necessity would clean out your savings.
If you need to buy a S$1,000 laptop (which you absolutely need for work), and you have just around S$600 in savings, it’s better not to empty your account. Use the instalment plan to pay a little every month instead.
This is to ensure that, if an emergency occurs, you will have sufficient funds to tide you over.
4. You Are Not Applying For a Mortgage or HDB Loan During the Instalment Period
Avoid taking large loans before you apply for a mortgage or an HDB Concessionary Loans. These home loans are capped by a Total Debt Servicing Ratio (TDSR), which restricts your monthly repayments to 60 per cent of your income. This is inclusive of outstanding debt obligations, such as credit card loans.
As such, having the instalment plan will lower your loan quantum (the amount you can borrow) when applying for a home loan. This can mean having to make a bigger down payment, or losing out on the property of your choice.
If any of the situations above apply to you, try using these credit cards for big purchases to offset your costs, or compare credit cards at SingSaver.com.sg. Just make sure you are able to pay for your purchase in full and by the due date!