Understanding credit card interest and charges

What a credit card is and is not

A credit card allows you to charge up to the credit limit set on the card. The outstanding balance represents what you owe. Interest is charged on the balance if you do not pay in full and choose to pay only the minimum amount due in your monthly statement.

If you have a credit card, you probably know how useful it can be, so much so that we often forget:

• A credit card is a form of borrowing; and

• Outstanding balance incurs high interest charges if it is not paid back in full

So while credit cards are convenient for cashless payment of goods and services, they should not be used as a long-term credit facility.

Credit card interest

The good news is that you do not have to pay any interest if you pay credit card bills in full before the due date.

However, if you are unable to pay your credit card bill, you need to know that:

• Interest is charged on a daily basis for the outstanding amount

• Any interest not settled by the next payment due date will also attract interest in the next statement

• Interest will also be charged on any new purchases until full settlement is received

In short, any unpaid amount on your current bill will be rolled over to the next bill, and charged an interest on top of that. The debt can easily snowball.

How credit card debt can snowball

Think that paying the minimum sum is good enough? Think again!

A debt of $5,000 could take more than 14 years to pay off!

Assume you have a credit card bill of $5,000 with Bank X. Credit card interest is fixed at 25% per year and the minimum sum is $50 per month.

Under this scenario, by the time the debt is fully paid off, you would have paid almost three times your initial debt!

What happens if you do not pay the minimum sum

If you are not able to pay the minimum sum for two consecutive months:

• You will not be able to obtain new unsecured credit facilities.

• Your overdue credit lines will also be suspended.

• Late payments could also negatively affect your credit scores with the credit bureaus.

Note: The minimum payment always goes towards paying the interest charge first, then to paying the outstanding balance. So, out of the minimum sum of $50, after deducting to pay for interest due, only what is left is used to pay down the outstanding balance.

Late fee and finance charges

If you do not pay the minimum sum by the due date, the bank can impose a late fee and finance charges. This amount attracts interest on your next bill.

The late fee is often a flat $100, regardless of the size of the bill.

Other costs of credit cards

Even if you pay your credit card bill in full every month, having a credit card can come with other fees and charges. These include:

• Annual fee – Charged every year as a subscription

• Card replacement fee – If you lose your card and need a new one

• Cash advances/ Withdrawal fee – Getting cash by drawing down from the credit limit

International transaction fees

Credit cards have made it easier for you to buy things overseas and online. However, you should be aware of the many fees associated with transacting with merchants located overseas.

Transactions In Foreign Currency

• All foreign currency transactions will be converted to Singapore dollars (SGD) by your card issuing bank. Exchange rates used may vary from day to day and from bank to bank

• Check your card's terms and conditions for how the conversion is calculated and what fees are charged into the final SGD amount billed

• The card company (Mastercard or Visa) will also charge an international transaction fee to the card issuing bank. This is typically passed on to you as stated in the card's terms and conditions

Overseas Transactions In SGD

• Some overseas merchants or websites list products and services in SGD or offer to convert your foreign currency transactions into SGD

• Exchange rates used are determined by the merchants and their payment processors. You should compare these rates against prevailing exchange rates

• Your credit card statement may show a higher amount than the SGD price charged by the merchant. This is due to an international transaction fee charged by the card company (Mastercard or Visa) to the card issuing bank

• The international transaction fee may also apply to cash withdrawals (in SGD) at overseas ATMs