Thanks to credit card instalment plans, it’s easy to afford big-ticket items in Singapore. But there’s a catch. We’ve all lied on the Internet by saying we’ve read the terms and conditions. Really, who can blame you? No one wants to read pages of dull legalese before using an app or signing in to a website.
When it comes to financial products though, skipping the T&Cs can mean losing serious money. Take for example your credit card’s 0% instalment plan. It makes big-ticket purchases more affordable, but you need to know what you’re getting yourself into:
1. Interest-free instalment plans aren’t entirely free
Before the instalment plan kicks in, you need to pay a processing fee ranging anywhere from 1.5% to 5%. The fees vary according to the amount charged and the length of the instalment plan. Check the terms to find out what the fees are, and compare across different credit card providers to find the lowest one.
The full price counts towards your credit limit
When you place an instalment plan on your card, your credit limit goes down. That’s because the bank blocks out the full purchase price from your credit limit. Your credit limit goes back up with each instalment payment, and is completely restored once the full payment is made.
Here’s a real-world example: You’re buying a Macbook Pro for S$1,500, using a credit card with a S$6,000 credit limit. You’ve opted for a 6-month 0% interest plan, with a monthly instalment of S$250. You have no other instalment plans on this credit card. At the start of the plan, S$1,500 gets deducted from your credit limit, lowering it to S$4,500. But every month, as you pay each instalment, the credit limit rises by S$250.
But let’s say this card already has a new S$5,000 VIP lifetime gym membership on instalment. Your available credit limit is only S$1,000 – less than the Macbook’s full price. In this instance, you can’t place the Macbook Pro on instalment. Either get a Macbook model that costs less than S$1,500, find a way to pay it in cash, or buy it later.
3. You’re actually repaying the bank, not the merchant
Many people assume that their card only gets charged for each monthly instalment. But that’s not how interest-free plans work. The full amount is actually charged to your card when the plan starts. You don’t feel it because the bank pays the full price for you (that’s why your credit limit gets reduced when you do an instalment plan). The instalments are you repaying the bank for the money they paid up-front. That’s also why California Fitness members with multi-class packages are stuck with their monthly instalments. Because the bank already paid the gym in full, members need to keep making the payments even if their packages are now completely useless.
4. There’s a fee for cancelling the card, terminating the plan, or early repayment
The good news is that nothing is stopping you from cancelling your instalment plan anytime. The bad news is that you will be charged an administration fee for repaying the amount early, cancelling the plan, or cancelling the card. The fee can be anywhere from S$100 to S$150. Note that if you cancel the plan, you need to pay the remaining balance or purchase price in full. Either way, you still have to pay for what you bought.
5. You don’t get points or cashback
If you’re paying by instalments, don’t count on earning air miles, cashback, or rewards points from your new TV. Because the bank is already shouldering the full cost, they won’t provide you with further rewards. The only exception to this is the OCBC Cashflo Card, which automatically splits big purchases into 3- or 6-month 0% instalments. You earn 0.5% cash rebate when your monthly bill is less than S$1,000, and 1% cash rebate when your bill is S$1,000 or more.
6. You get charged interest if you can’t pay by the due date
The instalment plan is only interest-free if you pay it in full and on time. If you skip a payment, you will need to pay finance charges, late payment charges, and interest on the outstanding amount. So treat your instalment plan as a fixed cost, and make sure to budget around each monthly payment.
When should you use interest-free instalment plans?
When you can’t save up for the full cash amount, credit card instalment plans are a useful way to afford a big-ticket item. But we recommend only using it for physical items, like a designer bag or smartphone. It’s too risky to do it for services like gym memberships or salon packages.
As we mentioned in Point 3, you still need to make payments even if a service provider goes out of business. And while you can cancel the plan anytime, you still need to pay the package’s full price plus administration fees.
If you have no other option but to use an instalment plan for services, put a limit how much you spend. Go for the 10-session package instead of the 50-session one, even if the latter is cheaper per visit. The last thing you want is to pay for a service you can’t use if the business closes down.
Just as you would obsessively research about which smartphone to get, so should you be as diligent with how you’re going to pay for it. Instalment plans are an expensive commitment, so do your research before signing up for one. Otherwise, you stand to lose money if you lie to yourself about having read the terms and conditions.
SingSaver.com.sg is a financial comparison platform for credit cards and personal loans in Singapore. Subscribe to its weekly newsletter to find out how you can make personal finance decisions.