By Value Penguin
Credit cards and personal loans often come with a concept called “minimum required payment.” This refers to the smallest amount you have to pay to your bank in order to avoid being charged late payment fees, usually ranging from 3% to 5% of your card balance. While a lot of people believe it’s okay to just pay this minimum amount, this is actually a myth: minimum payment requirements are actually very costly mistakes, especially for people in Singapore.
While it could help you avoid paying late payment penalty fees, minimum payment requirements do not exempt you from paying interest on the rest of your card’s balance. Therefore, even if you pay 5% of your balance that’s required, you will have to incur interest on the 95% that’s still on your bill. Without understanding this, however, many Singaporeans are suffering from committing this mistake over and over again.
Higher Interest Rates in Singapore than in the US
What’s important to understand is that it is way costlier for a consumer in Singapore to believe in the minimum payment myth than it is for a consumer in the US. For one, the average interest rate for credit cards is only about 14% in the US, while it is about 10% higher at 25% in Singapore. This means that Singaporeans who carry a balance on their cards are charged way more than Americans who carry the same amount of balance on their cards. To demonstrate how this 10% difference can truly make or break your finances, we prepared an example for you below.
Let’s assume that we have a balance of S$5,000 each on two separate cards. The first card charges 25% interest while the second card only charges 14%. If you were to make a 5% minimum payment on both cards for 12 months straight, the first card will incur total interest of S$1,009, while the second card will incur total interest of only S$540. The difference will be even bigger if we forecast this scenario out for 24 months, since remaining balance will be bigger for the first card.
Credit Card Rewards Can’t Compensate for Interest Charges
Some people may try to argue that generous credit card rewards in Singapore could help to offset this negative consequence of making only the minimum payment requirement. For instance, our best credit cards in Singapore earn about 5% on the user’s expenditures, while the best credit cards in the US earn only about 2-3%. However, a simple analysis proves that this is far from the truth.
Let’s go back to our example of 2 credit cards. Card A is a card in Singapore that earns 5% cash rebate on all your money, though it charges 25% interest on your balance. Card B is a card from the US that earns 3% rebate and charges 14% interest. If someone were to spend S$1,000 per month in order to earn cash back, but only repays the minimum required 5% of their balance, below is how their incurred interests & earned cash back will trend over a 12-month period. As you can see, interests will quickly outrun rewards in matter of 3 months for both cards. Card A will have earned S$600 in rebate; however, it will have incurred S$1,385 of interest and have built a balance of S$10,194. Card B, on the other hand, will have earned S$360 in rebate compared to S$752 in interest and S$9,737 in unpaid balance.
More Singaporeans Commit This Mistake than Do Americans
Given our analysis above, we were surprised to learn that more Singaporeans only make the minimum required payments than do Americans. According to a study released by the Consumer Credit Bureau, about 20% of credit card users in Singapore only make the minimum payment. This is substantially more than the 15% cited by US’s Consumer Financial Protection Bureau. It seems that higher cost of believing in the minimum payment myth has not deterred consumers in Singapore from committing this mistake.
When using a credit card, it is extremely important to fully pay down your balance at the end of your billing cycle. As we demonstrated above, doing otherwise can cost you hundreds if not thousands of dollars and potentially even ruin your finances permanently. If you already have made this mistake and built a substantial amount of credit card debt, however, it may be good time for you to consider getting a personal loan or a balance transfer loan to minimize your interest expenditures and pay your loans down at a manageable pace over time.
This article was first published on Value Penguin website.