Beginner’s Guide to Credit Cards
How Do Credit Cards Work?
A credit card is a line of credit that you can use to make purchases, balance transfers, and/or cash advances. It is basically a way to borrow money from a bank and pay it at a later date – at the end of your billing cycle.
This type of credit is different from a typical bank loan. A credit card allows you to “loan” money in small amounts and on a short-term basis. You are required to pay your outstanding balance monthly or you’ll have to face penalties and interest fees.
When you pay your monthly bill in full, you will not be charged extra fees or interest. Most banks offer online banking and mobile banking applications. This will help you monitor your credit card expenses as well as spending habits.
Some of the biggest payment networks are VISA, MasterCard, and American Express. However, not all merchants accept all types.
How Does Credit Card Interest Work?
Credit card interest is charged on the outstanding balance if you fail to pay in full. This means you will incur interest fees if you choose to pay only the minimum amount due for the month. The average interest rate of credit cards in Singapore is around 25%.
Every month, the credit card provider will send you a credit card statement that lists all purchases you’ve made during that credit cycle. On the credit card statement, you will find your total outstanding balance and the minimum amount due for the month.
Most banks in Singapore will calculate the minimum sum at 3% of the outstanding balance or S$50 – whichever is higher. As such, you may be tempted to pay only the minimum sum.
But if you only pay the minimum amount:
- Interest is charged daily for the outstanding amount
- Any interest that you fail to settle by the next payment schedule will also incur interest in the next statement.
- Interest will also be charged on any new purchases until you pay off your outstanding balance in full.
That said, any unpaid balance on your credit card statement will be rolled over to the next bill with interest.
How To Apply for a Credit Card?
Step 1: Credit Card Application
You can apply for a credit card either through your chosen bank’s website or by visiting the nearest branch in person.
Step 2: Check Your Eligibility
Before you fill out an application form, make sure to check the bank’s eligibility requirements. Note that each bank may have different eligibility criteria, especially the minimum income requirement.
Step 3: Submit Supporting Documents
The documents required may vary per bank. Typically, you’ll need to prepare the following documents:
- Copy of your NRIC
- Valid passport (for foreigners)
- Employment Pass (for foreigners)
- Proof of income
- Computerized payslips
- Letter of employment
- CPF statements
Step 4: Wait for Approval
Sit back and wait. The bank will process your credit card application for approval. It usually takes 10 to 14 business days. Once your credit card application is approved, you will receive a letter enclosed with your credit card.
Step 5: Activate Your Card
You can activate your credit card through SMS, phone call, or through your bank’s mobile app, or at the ATM.
For Singaporeans, you’ll need to be at least 21 years old to apply for a credit card. For student card applications, you’ll need to be at least 18 years old.
Additionally, you need to meet the eligibility requirements of the bank. For some banks in Singapore, you’ll need to meet a minimum annual income requirement of S$30,000. It’s best to check the bank’s requirements before submitting an application.
Simply fill out an application form online or at the nearest bank. Submit all the required documents, such as proof of income and a letter of employment. It usually takes 10 to 14 business days for the bank to process your credit card application.
Once approved, the bank will inform you how much you are allowed to borrow. You will also receive a letter enclosed with your new credit card. To start using the credit card, you’ll need to activate it and sign on the back.
With a wide variety of credit cards available in Singapore, it’s difficult to find the best one. However, the best credit card is one that will suit your lifestyle. Here are a few things to consider:
- Find a card that fits your spending habits: How much do you spend monthly? What are the things you spend on the most? For example, you are the breadwinner of the family and the one paying off the utility bills. Then it makes sense to get a card that will help you maximize your spend on monthly utility and telco bills.
- Determine the kind of rewards that will suit your lifestyle: There are different types of credit cards in Singapore. The three most common types are miles cards, rewards cards, and cashback cards. If you want to collect air miles for your upcoming travels, then it’s best to apply for a miles credit card. Or if you enjoy cash rebates, then you will benefit more with a cashback card.
- Check the terms and conditions: When comparing credit cards, you must also determine the details of the rewards and air miles programs. Additionally, look into the expiry dates, exclusions, minimum spend, and credit limit.
Applying for a credit card is a huge milestone. While a credit card comes with a lot of responsibilities, it also offers plenty of benefits. You can maximize these rewards if you know how to use the credit card wisely and responsibly.
Here are some of the benefits of using credit cards:
- Help build credit history: Credit cards help boost your credit score by building your credit history. This is especially helpful if you are planning to apply for a loan in the future. With a good credit history, you are more likely to be approved for a loan at a favorable interest rate.
- Give you access to funds: In Singapore, your credit card limit will depend on your annual income. With your credit limit in mind, you can purchase big-ticket items. Plus, a credit card is especially helpful in case of an emergency. With a credit card, you can have access to funds immediately.
- Get rewards and discounts: Credit cards offer rewards, such as cashback, points, and air miles. Some credit cards also come with discounts on petrol, groceries, and other everyday purchases.
- Sign up promotions and bonuses: Still unsure whether a credit card is a good idea? Some banks offer credit card sign-up promotions and bonuses. Some of these incentives come in the form of cash or rewards.
Visa, MasterCard, and American Express are payment networks. This means they manage credit card transactions.
Visa and MasterCard do not issue credit cards. They also don’t handle the merchants’ or cardholders’ accounts. All they do is maintain the card network so consumers will have a smooth credit card transaction.
Banks and American Express, on the other hand, issue Amex credit cards. However, there are only a few banks that issue American Express credit cards. If you want this type of card, you’ll need to apply directly with Amex.
So how do you choose a payment network?
Choose one that is widely accepted, such as Visa and MasterCard. They also offer contactless payment systems which are accepted in Singapore. AMEX is relatively less widely accepted in Singapore but is still implemented in most large retailers.
Credit cards that offer instant approval are very enticing, especially when you have a big-ticket item you want to purchase. While not all credit cards on the market are available for applicants immediately, there are a few that are easier to get.
Most of these credit cards are accessible and only require a minimum annual income of S$30,000.
- OCBC 365, OCBC 90N, and other OCBC credit cards
- Standard Chartered Unlimited Cash Back Credit Card
- Citibank Clear Card
- HSBC Revolution Credit Card
The number of credit cards an individual must have will differ. It will depend on the person’s ability to manage their finances as well as spending habits.
For the average Singaporean, we suggest having 2-4 credit cards. However, you must take these factors into account when determining whether you can manage to have that many:
- Annual fees
- Billing cycles
- Minimum spend requirements for perks and benefits
- Interest rates
Note that if you’re using too many credit cards, you might start missing due dates. This can lead to penalty fees and interest charges which can lead to your credit card debt getting out of hand.