In collaboration with OCBC Bank

How to play your (credit) cards right

Use banking apps to set limits and always pay full sum owed to avoid debt traps and maximise your rewards

Singapore

SOME months before the world came to a Covid-induced standstill, this reporter found herself huffing and puffing in a crowded Bangkok airport, making it to the connecting flight to Tokyo by the skin of her teeth.

It was the cheapest possible ticket to be found - booked at the last minute - for a short holiday with my sister, who was luxuriating in a premium economy seat on Singapore Airlines where she enjoyed a gin and tonic and lots of extra leg-room.

She had used her credit card miles for the flight. And just two months later, she flew to New York, again using her miles. Anyone can do it, she insisted. One just needs to be conscientious and plan how to maximise your credit card miles.

But first, let's step back to break down the basics of this game of cards.

With banks offering all kinds of promotions, rewards and rebates to lure customers to sign up for their credit cards, it begs the question of how banks actually earn money from cards in the first place.

Essentially, income from credit cards is categorised into two main baskets - interest income and fee income. Interest income is the interest charged on the rollover balance, or any unpaid amount at the end of the billing cycle.

This is probably what your parents warned you about when you were growing up - interest can come up to about 27 per cent per annum. If you just pay the minimum each month while continuing to spend freely, you will likely find yourself up to your eyeballs in debt down the road.

Another contributor to interest income is the credit card cash advance. The cash advance is a cash loan taken out against your credit card limit. This is possibly the most expensive way to borrow from a bank as you are charged interest on the outstanding amount from the moment you withdraw the money - usually about 28 per cent - and this is compounded. There is also an upfront fee. Avoid this if you can as you are better off getting either a personal line of credit or a term loan, with less onerous rates.

As for fee income, this would include the fees that banks charge merchants when customers use their credit cards.

A cut of about 3 per cent will go to the banks and card payment processors for each transaction, which is why some mom-and-pop stores - like my neighbourhood hair salon - resist offering credit card payments.

But as consumers spend more on their cards to earn miles to redeem a flight, or to secure some cashback, their spending habits are in effect exerting pressure on merchants to enable card transactions, through which banks and card processors earn fees.

Other ways that banks make money are from late fees and annual fees.

While credit cards can help customers regulate cashflow on their spending, the ease of instant gratification - with actual payments due several weeks later - can induce overconsumption, or excess debt.

With that in mind, there are millennials who avoid credit cards, despite Singapore being a highly banked market. Among those young adults who do not own a credit card, the reluctance comes in part from memories of growing up with parents mired in credit card debt. For others, there is a fear that they will end up forking out more to pay the high interest rates if they forget to pay in full.

This may be veering towards the more conservative end of the spectrum, but it is certainly a valid fear. According to the OCBC Financial Wellness Index 2020, 38 per cent of Singapore millennials often pay only the minimum sum on their credit cards.

Vincent Tan, head of cards business, OCBC Bank, said: "I attribute these mistakes to 'too many, too complicated, too late' - having too many cards, complicating their lives by responding to too many credit card promotions, and making credit card payments too late, thereby incurring late fees which could have been prevented."

How much is too much? When you cannot comfortably pay your bill in full each month and save a portion of your salary at the same time - that's when you know you have to cut back.

That said, there are many ways to cope with this today. Mobile banking apps are loaded with functions to send users alerts when credit card bills are due. There is little room to excuse overdue payments these days.

To add, one's unsecured credit facilities limit cannot exceed 12 times of monthly income, given regulations from the Monetary Authority of Singapore on the balance-to-income ratio.

On top of the hard cap, some mobile apps will allow customers to set their own spending limit on credit cards that is more manageable. The apps can also alert the customer when his spending is close to hitting the limit.

More than that, these apps can also help users track their finances by automatically categorising them into broad baskets so they know exactly where their money is going.

The other thing to note is how to avoid falling prey to scam payments, particularly as Singapore saw a jump in scam cases last year, with cyber extortion, e-commerce, social media impersonation, phishing and loan scams all up from a year ago.

This was partly due to greater online activity as the digital adoption rate was greatly accelerated due to Covid-19. Also, scam activity tends to increase during a crisis.

"Provide card credentials only to reputable e-commerce sites - if the site is new or unfamiliar, customers are advised to exercise extra caution," said Mr Tan.

For a start, check your credit card statement each month and report it immediately if anything is amiss. Such transactions can usually be reversed quite easily if you did not authorise them.

But if the fraudulent transaction was cleared because a customer gave away a one-time password (OTP) to strangers, then it gets a lot more complicated. Banks may not be able to claw back funds as most payments are carried out instantly.

  • The Money Playbook is a new personal finance column that discusses how to take charge of your financial well-being.
    This is the fourth of an eight-part series.

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