This is a guest contribution by Credit Bureau Singapore, as part of a partnership between CBS and AMTD PolicyPal Group (PolicyPal and ValueChampion), in line with our mission to empower people with financial knowledge and help them attain financial wellness.
To financially savvy consumers, unsecured loans such as credit cards and personal loans can come in handy, especially when you need to purchase a big-ticket item or when you want to optimise your purchases by earning cashback and reward points. On top of that, retail banks and major financial institutions in Singapore offer a wide range of credit facilities that cater to every individual’s needs, along with attractive interest rates and/or loan repayment tenures.
However, managing credit can be a complex and challenging task. If done so poorly, many people may end up making credit mistakes that can have long-lasting consequences on their credit report and financial well-being.
This article highlights a few common credit traps you should steer clear from.
Common credit mistakes to avoid
1. Charging all your payments to Instalment Payment Plans (IPP)
An Instalment Payment Plan (IPP) is one where a consumer only needs to pay a percentage of the cost upfront when making a purchase. The remainder can be paid regularly over the subsequent months until the item is fully paid off. Buy Now Pay Later (BNPL) services are an example of an IPP. Some credit cards may also offer such a feature.
But while IPPs seem like a good way to pace your monthly spending, they may give you a false perception that you can easily repay your bills and lead you to make more impulsive purchases. It is therefore important to exercise prudence and spend only what you can afford (upfront) so that you don’t end up buying things beyond your budget and struggling to repay them down the line. Also, make it a habit to always peruse your credit card statements so you can effectively track your spending and catch any missed payments or fraudulent charges in time.
2. Paying only the minimum due amount
Some lenders allow consumers to pay only the minimum amount, and a common misconception many consumers have is that credit cards are “free money”, that they can spend as they please and simply pay the minimum payment at the end of the month.
However, this means that your outstanding balances will accumulate over time with high interest charges on top of that. In fact, the average credit card interest rate is a jaw-dropping 25%. Paying only the minimum amount will thus bring about long-term negative impact as you could end up struggling to pay off your compounding bills with the high interest charges.
On top of that, not paying your bills in full on time can have a detrimental effect on your credit score, which will make it harder for you to apply for loans in the future, for instance, when you need to buy a house and/or take out a mortgage.
To avoid this, be sure to set up standing instructions such as GIRO or calendar reminders to ensure that you never miss a payment due date.
3. Overlooking the terms and conditions
Many people tend to skim over the fine print, but having a thorough understanding of the penalty charges and interest-free repayment periods can smoothen your debt repayment journey and you can reduce your chances of being blindsided by a clause that you were unaware of.
For instance, some home loans that are beyond the lock-in period will tend to have a spike or surge in interest rates. Therefore, if you are planning to refinance your housing loan, it helps to always check your lock-in period expiry date. It is thus imperative to take a moment to read through the terms and conditions before you sign yourself up for a new credit facility.
4. Exceeding your credit limit
Some banks or credit card issuers allow you to spend beyond your assigned credit limit with an over-limit fee. But if you have a habit of maxing out your credit limit, you should be mindful of the repercussions of doing so, especially if you are unable to pay back the full amount on time. A high credit utilisation ratio will have a negative influence on your credit score over time.
However, some banks might grant you special credit limit increases if you need to make a large transaction urgently. However, it is not advisable to continually request for credit limit increases as that may impact your credit score. On the flip side, you can also request your bank to lower your credit limit if you know that you have a tendency to overspend on your credit lines.
5. Neglecting your credit report
Your credit report provides you with a comprehensive overview of all the credit facilities you owe with contributing retail banks and major financial institutions in Singapore. The last but key credit mistake many people is that they don’t check their credit reports regularly, assuming that everything is in order. However, discrepancies can happen on your credit file, and checking your credit report regularly is the first line of defence you have in ensuring that your credit records are in order.
Don’t leave things to chance. Take matters into your own hands and check your own credit report to make sure that your credit information is in place. You can obtain a complimentary credit report from CBS within 30 calendar days after your new credit application has been approved or rejected by a CBS member.
Use credit responsibly
Responsible credit management is an investment in your financial well-being, and the effort you put into avoiding these credit mistakes will pay off in the long run. Borrowing beyond your means can leave you struggling financially as you go further into debt.
Before applying for additional credits, consider all the other existing loans that you hold and get a keen understanding of your financial standing. An equally important task is to do your due diligence and clear any doubts with the lenders before you agree to take up any new credit or loan facilities.
Where can I learn more on my credit report?
To understand more on what Credit Bureau (Singapore) Pte Ltd does and how your credit report affects you, go over to the CBS website here or view a sample credit report with detailed explanations over at this handy website. You can also follow CBS on Linkedin or Facebook for more useful content and tips on maintaining a good credit reputation.
If you’re ready to take the plunge and apply for a loan, check out Policypal’s roundup of the best personal loans in Singapore available in the market today.