[Tips for freshmen] Three common credit card traps to avoid

As the new semester begins, university students are presented with attractive credit card promotions and offers by banks which set up promotion booths on campus. Typical offers include welcome gifts, rebates and annual fee waivers, enticing freshmen to apply for their first credit card.

If you make good use of your credit card wisely and pay your bills on time, it can help you to save money, earn bonus points for gift redemption, and minimise physical contact during the pandemic. However, there are also some pitfalls that you should look out for.

Trap 1: Should I make minimum payment?

It may seem easy to make just the monthly minimum payment on your credit card, but your debt can quickly snowball too. For example, with an outstanding balance of $20,000 and an interest rate of 35% p.a., it will take 26 years to pay off the debt if you only make a minimum payment every month, provided that there are no more transactions during the period. What’s more, interest will be charged immediately for all new transactions, existing interest-free instalments and autopay arrangements through your credit card (such as monthly insurance premiums).

Trap 2: Is it easy to get a cash advance on your credit card?

Many credit cards offer the option of a cash instalment plan, allowing you to convert available credit limit into cash. However, this seemingly handy service with no application and approval required generally comes with higher interest rates exceeding 30% p.a. Unlike general transactions with an interest-free payment period, cash advances will accrue interest immediately, and incur administrative fees.

Trap 3: Is it easy to extend the repayment period?

It is important to repay the monthly balance on time – the longer the repayment period, the more interest it will incur. This snowballing effect will not only create financial stress, but also have an impact on your credit record. A low credit score may prompt banks and financial institutions to charge a higher interest rate, or even deny your future loan applications. Besides, some companies and employers may review your credit report and score during the recruitment process.

How much should I repay each month to clear credit card debt?

If you have any unsettled credit card bills, you should set a clear goal and make repayment as soon as possible to save on interest. You can use the calculator on the Investor and Financial Education Council website to work out the required monthly repayment amount.

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