Financial Freedom SG

When I first started working, I had many misconceptions about credit cards. From what I heard through friends, it seemed that credit cards were really bad things that will drain a person dry and leave him bankrupt.

After working at a securities firm and a bank's call centre, I learn a little more about this product. First and foremost, it is a convenient means of payment. When you buy things, you do not have to queue to withdraw money from the ATMs, you'd just need the plastic.

Secondly, your payments are actually deferred for anything from 15 days to more than one month plus depending on your credit card payment cycle. So things that you get now and eat now, you pay it later.

Thirdly, when you are overseas, it is a convenient and relatively safe mode of payment except that you should scrutinise the swiping of the card to make sure that the cashier or anyone who handles the payments don't do anything funny with it (like take down your number and using it for internet transactions).

Fourthly, and this is something that a lot of people like, the rewards system for credit card purchases can be quite attractive since without the credit card, you would have bought the same things. For the big consumers who buy big ticket items, it can be quite a bonus to be able to use these to get things an LCD tv for free for example. Some credit cards even let you exchange these for air miles so that you can get a free trip somewhere or get a bump up the grade from economy to business and so on. The best cards are those that even pay you back a portion of what you have spent.

Fifth, you are ask for a temporary credit limit increase when you are getting married and need to use the card to pay for your banquet or for any such big ticket items that you need. However, the crux is that your credit history must be good or the authoriser will not approve the limit increase. So it beats carrying with you large amounts of cash and inviting robbers and thieves.

With so many advantages, you would think no one would say bad things about the credit card. However, there have been quite a lot of people who got burnt by the credit card. There are those who have lived it up on immediate gratification and buy till their credit limit for the cards is max out. And they apply for another card with another bank and max it out again. And they do it again .... and again. Soon, they apply for credit cards because they want to use it to pay off the interests of all the other credit cards that they have maxed out. So the disadvantages of credit cards are:

Firstly, they entice consumers to spend a lot more than what they can afford. So they dig themselves a very big hole.

Secondly, the interest rates charged on credit cards can be very high. In Singapore, the credit card interest charged for rollover balances (amounts that you did not pay in full in your credit card balance- ie if your statement shows $1000, and you paid $500, the rest of the $500 is subjected to this interest charged) is 24% per annum! So don't even think of using credit card for investments, even Warren Buffet cannot get that kind of returns to overcome 24% per annum interest debt.

Thirdly, there are actually charges imposed on the merchants who will transfer these charges to the consumers. So a product or service that could have been sold for $10 might have been sold at $11 instead by the merchant to cover the credit card charges. However, for the credit card user, this is a price that you have to pay regardless of whether you use credit card or not, so you might as well use it. But for the people who don't use credit cards, they are actually helping to finance the reward scheme and credit card system :)

Fourthly, credit card users are slapped with late payment fees, annual fees, a high exchange rate that is unfavourable to the user for any foreign transactions and all the usual bank charges for anything from disputes and printing of past statements etc.

After all those disadvantages, do you still want a credit card?

I think that despite the disadvantages that the credit card brings along with the benefits, the advantages outweigh the bad points. The credit card ranks in my top 10 inventions of Mankind :)

It works like the credit system between companies, where companies extend a long grace period for another company to pay it back for goods or services rendered. This enables the economy to grow at a faster pace and expand beyond what the money supply would have limited its growth.

So what should you do as a credit card user? First, add in your head the amounts that you have swiped every day into a book like a ledger that companies used. And once you have hit 50% of your monthly salary, it is a stop signal that you are not allowed to swipe anymore credit cards. Second, always pay off the credit card balances and leave no rollover balances at all. If you have any rollovers, make sure for the next month, you don't use the cards at all. Put the cards into a drawer and keep it there till the next month (ie when your pay arrives). If your wife/husband is the one spending like there is no tomorrow, get him or her to go to the bank with you and ask the bank officer to decrease his or her credit limit to the level that your spouse is agreeable to (the lower the better)

NEVER spend beyond your means. Thirdly, do not be hooked on the zero instalment scheme fallacy- it is a immediate gratification tool wrapped around the big hammer coming straight down the sky going for your head.

Fourth, when you have any charges, like annual fees and late payments, make sure you call the bank's call centre and ask how to cancel the card. They will fall over themselves to offer a waiver of the fees. If they don't find a bank that does.

Fifth, find an international bank that does not have a big presence like the local banks in your country. They tend to be well staff and have bank officers that actually answer like within minutes if not seconds unlike some local bank's call centre that you literally have to wait and wait and.....

So a credit card can be a trap or a marvel, it is how you use it