Sunday, August 26, 2007

Personal Finance Part 2 – Credit Cards

To continue my series on personal finance, I would like to touch on an often controversial, yet unavoidable issue – that of credit cards. It is a well-know fact that developing countries such as Singapore have residents who are increasingly dependent on credit and debt as a way to pursue an “enhanced” lifestyle. Since just one generation ago when Singapore became independent, our lives have become increasingly fast-paced and materialistic. This is evident from the prevalence of sports cars being spotted recently on the streets of Singapore and also from the various interactions from my peers, friends and colleagues. The conversation would inevitably steer towards the “possessions” one has, what car you are driving (if you own one) and what flat you lived in. Perhaps it is a result of Singapore’s strong economic growth which has precipitated such affluence and materialism, but the constant pursuit of money is still a worrying trend. Credit cards are often mentioned in the media as exacerbating this problem by offering cheap credit to people who do not know how to make full use of it. What do I mean by this ? Read on to find out….

Credit cards are basically a form of debt given to a cardholder such that he can utilize this debt to “spend” until he reached his credit limit (this is usually less than twice his monthly salary). The card allows one to do hassle-free shopping (you do not have to bring cash around) and also allows you to spend much more than you normally are able to. At the end of the month, a statement summarizing the previous month’s transactions is mailed to the cardholder, and he has until a specific deadline to choose to pay the minimum sum or the full amount, after which interest (usually as high as 24% per annum) will be levied on the outstanding amount. The pros and cons of credit cards are listed in the simple table below:-

Advantages of Credit Cards

i) Allows one to do hassle-free spending, without having to carry massive amounts of cash for a major purchase;
ii) Allows one to spend more than one normally can as the card limit is usually about twice the cardholder’s salary;
iii) Gives the cardholder a 2-month interest-free “loan”, as the statement usually arrives one month after the date of transaction, while the deadline for settling the account is another month from the date of receipt of statement. In effect, this allows you to retain your cash for 2 months without settling your outstanding bills;
iv) Summarized statement showing the vendors visited and amounts paid: this acts as a sort of accountability statement and record for you to review your purchases for the previous month;
v) Perks and bonuses which come with each card which include accrual of loyalty points, special discounts and good shopping/holiday deals

Disadvantages of Credit Cards

i) Allows one to roll over debts into future periods, effectively incurring high interest charges for those ignorant of such compounding;
ii) Encourages wanton spending as the card gives the feeling of not departing with immediate cash, thus the psychological effect is dissimilar from actually forking out real money or using a debit card (which immediately deducts your bank account);
iii) Creates a “plastic” culture, where credit cards are seen as a way to enhance spending and allow people to roll over their balances. Thus, many people are caught over-extending themselves and living on “borrowed money”.

In spite of the apparent disadvantages, I am of the belief that it is up to the individual to control his or her proper use of the card, as the card can be a powerful tool when used correctly as it gives a 2-month interest-free loan. It is akin to fire in that we must know how to control and use it; it is useful when used for cooking and heating but it can also destroy and kill.

Recently, I came across an ad for the Citi Clear Card , which changes the concept of owning credit cards. Most credit cards come with minimum income requirements but this card has no minimum requirement and people as young as 21 can apply for it. Those above 18 can apply too but require parental consent. I support the aim of this card as it attempts to educate the young on the benefits of credit, while at the same time it also has sufficient safeguards to ensure that these youths do not go astray. Such features are:-

a) Card is automatically blocked once the cardmember misses his/her payment – this prevents the cardholder from incurring further debts assuming that he or she is unable to pay for previous ones

b) The credit limit is capped at S$500, which is a good way to ensure that cardholders do not over-spend. This also allows the cardholder to appreciate the value of money by starting small until he/she goes out to work and earn money.

In addition, the Citi Clear Card also has discounts and privileges at over 600 merchant locations, which is one of the advantages I mentioned above. Not many cards offer a choice of so many merchants and some of the partner include Velvet Underground, Winebar, Heeren Shops, Café Cartel, TCC, Coffee Club, Haagen Dazs and California Fitness just to name a few. One new noteworthy feature worth mentioning is their one-touch biometric payment which allows you to settle your purchases with the touch of your finger ! Truly technology can work wonders and what safer way is there than your own biology which cannot be replicated like normal cards can ? I was also pleasantly surprised when I found out about this feature as I admit to feeling nervous over possible credit card fraud. Online shopping and rewards programs are also available with this card and it would seem that Citibank is having a first-mover advantage by introducing this card to the youths and targeting a new segment of the population.

In fact, with the safeguards for this card and the additional perks, I was even thinking of signing up for one myself as I currently only have a UOB card and it would be good to enjoy the perks associated with the Citi Clear Card. For all those interested in applying, please click here in order to be directed to the relevant webpage by Citibank.

The above is just an example of one of the more recently launched credit cards which incorporate good benefits and also safety features in order to promote good credit habits. Thus, in conclusion, please do make use of credit cards in order to obtain your free 2-month loan but please DO pay the full amount in time in order to avoid the massively expensive 24% per annum interest charges which follow !

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