Almost everyone above the age of 25 own at least one credit card in Singapore. Credit cards have become an essential in our modern day consumer life and also a major revenue generator for financial institutions. Given the minimum eligibility requirements to open an account, it is smart to handle your money prudently before even receiving the card in your mail.
These are some of the dangers of only paying the minimum amount reflected on your statement.
Assessment of Creditworthiness by Financial Institutions
Credit Bureau Singapore (CBS) provides personal consumer credit reports, where it displays how a consumer makes their payment monthly on their credit card bill. If you only pay the minimum amount on your statement, this may eventually put you in danger of accumulating a lot of debt.
Moving forward, when you want to apply for a mortgage or car loan in the future, the banks would use this information as an assessment of your creditworthiness to determine if they should grant you the loan. Thus it’s critical to make payments on time, all the time and make payment in full, always.
When you pay only the minimum balance every month, it will increase to a higher amount the next month. Little by little, it goes on and on, creating a snowball effect until the debt amount is so huge that is out of your reach by then.
Balances that are not paid are passed over to the following month, and are subjected to interest charges that will be calculated based on current balance. The bigger the balance amount, the higher the interest incurred. Since you are only nibbling on your credit card debt, it will undeniably take a prolonged period of time to finish paying it off.
Balance to Income (BTI)
Credit card balances that are not fully repaid by the payment due date are subjected to interest charges and are termed under the group Unsecured Interest-Bearing Balances which includes all unsecured product types like personal loan and overdraft etc.
BTI is calculated by this simple formula:
Total Unsecured Interest-Bearing Balances across all Financial Institutions
(Annual Income / 12)
By adding the total unsecured interest-bearing balances across all financial institutions divided by your monthly salary, the BTI ratio will be calculated.
There are changes to Monetary Authority of Singapore (MAS) credit cards and unsecured ruling, effective 1st June 2015. This is to help individuals avoid accumulating excessive debt and to enhance the lending practices of financial institutions.
From 1st June 2017, the BTI ratio should not go above 18x your monthly income for 3 months in a row. If not, you will not be able to
- Charge new purchases to your credit card
- Issue cheques or draw money from your unsecured credit line
- Pay recurring charges with your credit card eg. Utility bills, insurance premiums
- Apply for new credit cards, unsecured loans or increase your credit limit
Thus, it is recommended to stay below a healthy balance level relative to your income.
Lower Credit Score
A credit score is a number that represents a consumer’s risk level based on their credit history at a particular point in time. It uses past information to predict future good and bad payment performance.
CBS credit score ranges from 1000 to 2000, where, statistically, within the next 12 months, individuals scoring 1000 have the highest probability of defaulting on a repayment, whereas those who score 2000 have the lowest chance of reaching a delinquency status.
CBS credit score may be affected by various combinations of key contributing factors such as recent enquires for new credit, presence of default or slow payment statuses. Paying your credit card bills on a timely basis and avoiding any overdue and default payment behavior will have a positive impact to your score.
Credit utilization is the ratio of your credit card balances to credit limits and measures the amount of your credit limit that’s being used.
A high credit utilization ratio can hurt your credit score. Higher balances are more difficult to afford and could be an indicator that you are overstretched. High utilization lowers your credit score and signals to financial institutions that there is an increased risk of you falling behind on payments.
Lenders like to see plenty of breathing room between the amount of debt reported on your credit cards and your total credit limits. The more debt you pay off, the wider that gap and the better your credit worthiness. When you pay the full balance on your bill each month, you are taking an advantage of an interest-free loan from the card issuer. If you make only the minimum payment on a significant balance, it can take years to pay off the full debt and will ultimately affect your credit score which in turn reduce your chances of taking up a loan.
Wasted Financial Opportunities
Imagine paying more than $10,000, the money that was subject to interest charges could have bought you a relaxing holiday, appliances for home or even a nice furniture.
On top of that, it comes along with stress and more stress. Because of the escalating financial obligations that credit cards can bring, the effect that debt has on us will always be at the back of our minds. Until you can completely pay off the debt, you will always be anxious about your financial position.
Owning a credit card certainly has its perks. It’s easy to use, gives you cashback after spending a minimum sum every month, offer special rebates and without a doubt very convenient. However, having said that, it is good to note that you should not excessively splurge. As much as the card offers a lot of temptation to overspend, the decision to be impulsive today will come back and haunt you in future. Know what you can afford and what expenses to let go will definitely put yourself in a better financial position.
If you would like to check on your credit score, you can obtain your personal credit report from Credit Bureau Singapore at $6.42 per copy.