A credit card is a kind of borrowing that allows you to pay for goods and services without cash. Credit cards are considered short-term credit facilities because you pay off the amounts owing every month as they fall due.
How to use a credit card
Credit cards can be used to procure goods and services in all outlets that accept the credit card brand you have. After purchasing anything using a credit card, you will be given a printed slip to sign, confirming your purchase. One copy remains with the merchant while you retain the other copy for your file.
The transaction details will then be sent to the card issuer by the merchant. This amount will be paid to him minus a small transaction charge. The card issuer will then send you a statement, usually monthly, detailing your purchases and letting you know how much you’re required to pay and when by.
Depending on the details of your card, full payment on time may come at no interest, but partial and/or late payments attract interests. Credit cards can also be used for online shopping. It’s important to shop only from trusted merchants with highly secure payment systems. After making an online purchase, print out the confirmation page or invoice slip for your records, and match the amounts against those reflected in your statement.
Applying for a credit card
Credit cards can be applied for from credit issuers. Typically, your issuer will look into your credit history through your credit report and then decide whether or not to accept your request and how much credit to extend to you. This is known as your credit limit. The credit card issuer uses your credit report and income statement to determine your repayment ability, which will dictate the limit set for the card.
In Singapore, the minimum annual income to get a credit card is $30,000. For such individuals, the maximum credit available is limited to two-four times their monthly income depending on repayment abilities and other financial obligations. This is just like other unsecured credit options, which are governed by similar limits.
The credit limit also includes all other credit cards that an individual has as well as any unsecured debts/loans they have.
Principal card holders can apply for supplementary cards to give people who do not meet the minimum criteria for income. The holder of this card must also be 18 years old and over. A supplementary card’s debt is the responsibility of the main/principal card holder.
Common Features of a credit card
- Amount due
A credit card extends credit to you to the level of your credit limit. The amount outstanding at the end of the credit card statement represents the amount owed. You may pay the full amount owed/due, pay it partially or only pay the minimum sum stipulated. If you pay partially, the remaining balance will attract interest. In addition, all new items charged to the credit card will also attract interest from the time of purchase.
- Grace period
Most credit issuers offer a credit-free period of 20-25 days. In this period, if you make a full repayment of the outstanding balance, you won’t attract any interest.
- Minimum sum
Where you cannot make a full payment, the issuer will require you to pay some minimum amount each month by the due date indicated in the statement. Usually, this sum is the higher of the specified amount or 3-5% of the due amount. Paying the minimum amount on time precludes you from attracting the late payment fees as well as getting a bad entry onto your credit report.
However, by rolling over the balance, you will attract interest on the remaining amount as well as for all subsequent purchases once the grace period runs out. Interest is calculated on the amount owing from the statement date or date of transaction, depending on the terms of the issuer.
What you can do with your credit card
- Balance transfer
For a limited period, commonly 6-12 months, you can transfer outstanding balances from credit card issuers with higher interest rates to one with the lowest interest. After the allotted time, the interest reverts back to the normal interest rate, usually 24% p.a.
This is subject to the terms and conditions of the issuers. For instance, some issuers revoke the grace period feature on new amounts once a user transfers their balance. Try to pay off outstanding debts before adding new purchases, especially if they come with higher interest rates.
- Cash advance
This facility permits the card owner to draw down their credit limit by taking out cash. Usually, it attracts a processing fee of 3-6% of the cash advance amount, with interest on withdrawal charged at 2% per month (24% p.a.) from the date of advance until full repayment.