Archive for November, 2005

To Credit or Not?

Wednesday, November 2nd, 2005

Whenever I see articles on the Straits Times about people getting into huge credit card debts, I can’t help but feel like cringing. Do people not know what they are getting themselves into? Thus I thought, hey, an entry about credit cards is due! So here are my thoughts about the whole matter.

First of all, the most crucial question would be: To get or not to get.

There seem to be about three categories when it comes to this:

    (1) The first category says, “NO! DON’T GET IT! Credit cards are evil! Quick go cut up your credit cards now!”

    (2) The second category feels that credit cards give them access to money they don’t have.

    (3) The last category contains the smartest people. These people pay off their debts in full every month.

Of course if you do not have self-control, for goodness sakes, DON’T get a credit card. If you really must have a card of some sort, settle for a debit card or something. You’ll be safer that way.

if you can’t deal with responsiblities, cut them up

If you belong to (2), and have been led to think that credit card is like ready credit, go bang your head against the wall and then come back and continue reading this. Banks love people like you, because people like you pay off just the minimum each month, allowing the remaining amount to snowball to something outrageous with the high annual interest rates. It’s people like you that let credit card companies make big bucks.

I mean come on, would you borrow money from a loan shark? No? Then why on earth would you spend money you don’t have, with interest rates almost as outrageous as borrowing from loan sharks? A $1 item would become $5 with time. Would you rather not keep that $4 than give it to the banks? Don’t be an idiot. If you don’t have the money, don’t charge it to your card.

I don’t care if they’re offering you a chance to win a car, only if you pay the minimum and not more each month. It’s NOT worth it. If they offer you a car, not just a chance, go ahead, just pay the minimum. But you and I both know that’s impossible yah?

The smartest group of people, in (3), they make use of credit card companies for their own interests. You see, there are many reasons why you should use a credit card, and it all starts with having money in the bank, to pay off those expenditures.

    (a) Many banks readily offer a waiver on their annual fee for the first year, for first time users. On top of that, some may even give you bonus points and free gifts for signing up. For every $1 you spend, you get points which can be redeemed for gift vouchers or free gifts in the future.

    The average redemption rate is about 1%*. That means for every $100 you spend, you get back something that’s worth $1. So if you spend $500, you might be able to redeem a cup of coffee at Starbucks or something, providing your credit card company has links with Starbucks. This way, you’re essentially getting something free, for stuff that you would pay for anyway.

    free coffee anyone?

    (b) By using your credit card to pay for things first, your money could be sitting in the bank taking in some interest (yes pathetic, but still some at least) before being drawn out at the end of the month to pay off the card. Or if you are more experienced with dealing with money, a lot can be done to grow that money in just one month.

    (c) Some credit cards offer you discounts at restaurants and retail outlets. It benefits you, and gives you incentive to use their card. This will save you money in the long run, yes only if you pay in full every month.

Be wise. Banks make money off people who don’t pay off their credit card bills. Don’t be a sucker for them.

It’s not hard to see where Singapore is headed towards. It’s only a matter of time before debt consolidating agencies come into play here. It’s already so prevalent in the US, where majority of the people there, especially college students, are in debt. These consolidators will work with you to pay off your debts. What they do is they pay off your debts, and you owe them the money instead, but at a lower interest rate.

Isn’t it better to be debt-free though?

*All this advice is based on my experiences with credit cards while I was in the US. I’ve talked with people about why they use credit cards, or why not, and above is the summary I’ve reached.