Credit cards are bad.
Credit cards are scary.
Credit cards ruin people’s lives.
We all know someone who has a biased view against credit cards.
Maybe their family has experienced the pains of poor credit management, maybe they know someone who has, or maybe they’re just scared of the potential dangers of credit cards.
Despite all this, a credit card is an extremely powerful tool that can help you stay on top of your finances.
Using a credit card well will actually help you to save money in the long-run and bring you value in many ways.
If you’re a recent graduate and are not sure if you should get a credit card, hopefully this post will be able to convince you to.
And if you’re a student, don’t feel left out – there are ways for students to get access to credit too, and I’ll cover that in a future post.
Unless you have poor money-managing habits and are unable to control your spending, I believe that you absolutely need to use credit cards – and here are 4 good reasons why.
WARNING: You should only use a credit card if you are responsible with your spending. Don’t spend more than what you can afford and pay off your bill in full on time every month.
Note: In this post, credit cards refer to regular credit cards and not student credit cards. Student credit cards are only good for points 2 & 3, but not points 1 & 4.
1: EARN FLIGHTS/CASH WHILE SPENDING
Earning rewards while spending money is a good feeling.
Credit cards allow you to earn miles, reward points or cashback from your spending.
With miles, you can redeem air tickets and hotel stays – allowing you to travel for free.
With reward points, you have the flexibility to redeem them for miles, cash vouchers or cashback.
If you enjoy travelling, you may opt for a miles or rewards card.
Most miles cards and many rewards cards have no monthly minimum spending to start earning miles or reward points.
This makes them easy to use because you don’t have to worry about spending a specific amount of money every month, and you can be guaranteed that you will always be earning something.
Some cards reward up to 4 miles/$1 of spending.
This means that if you spend only $500/month, it will take you about 2.5 years to be able to redeem a return business class flight to Taipei on SIA (61,000 miles, as of August 2020).
And honestly, that’s not bad.
Think about all the money you’ve spent in the past – what if all of those spending went towards earning miles?
You’ll probably be able to redeem business class flights to several countries of your choice.
I don’t know about you, but that sounds awesome to me.
If you like earning cashback, you may opt for a cashback credit card.
Cashback credit cards usually earn cashback at a higher rate than debit cards or with less restrictions when earning them.
Consider the following table comparing 2 cashback credit cards against the DBS Visa debit card (the best debit card out there, IMO).
|Card||DBS Live Fresh||AMEX True Cashback||DBS Visa|
|Cashback:||5% on eligible contactless spend
5% on eligible online spend
0.3% on other eligible spend
|1.5% on all eligible spend||3% on eligible contactless spend|
|Cashback Cap:||$20 / category||NIL||$20|
As you can see from the table, the DBS Live Fresh card offers higher cashback and on more categories of spending than the DBS Visa debit card, at the price of higher monthly minimum spending.
On the other hand, the AMEX True Cashback card offers lower cashback than the DBS Visa debit card, but offers cashback on a wider category of spending with no monthly spending requirements or cashback cap.
In other words, one offers higher cashback for spending more every month while the other offers lower cashback but is worry-free because there is no minimum monthly spending required.
Whether you enjoy travelling or earning cashback, the variety of credit cards available in the market make it easy to find a credit card that is well suited to your priorities, needs and lifestyle.
Learning how to maximise the rewards you earn from your spending with credit cards can definitely save you a lot of money that you wouldn’t be able to otherwise.
2: BUILD CREDIT SCORE
Credit score is a score that indicates how likely you are to default on payments like credit card statements and loan payments.
Your credit score has many implications.
It is used to determine whether you are eligible for a credit card, your credit limit on the card, whether your loan gets approved, how much loan you get, the interest rate on your loan and more.
Even some employers check your credit score when they’re deciding who to hire.
And these go on to have further implications in your life. What kind of house/car you can afford, how much you end up paying for said house/car, what kind of jobs you manage to get.
That’s why it’s so important to have a good credit score.
So how does having a credit card help you build your credit score?
Well, your credit score is determined by a variety of factors:
- Timeliness of payment: how punctual you are in paying off your credit statement
- Credit history: how long you have had access to credit
- Credit utilisation: how much of your available credit you use
- Credit exposure: how much credit is available to you
This is not an exhaustive list, but it gives you an idea of what affects your credit score.
More importantly, you can only have a credit score when you have access to credit.
Think about it this way: you can only be graded for a subject that you’ve taken and studied for.
And what’s the easiest way to get access to credit?
Yup, you guessed it – by having a credit card.
If you don’t have a credit score, banks are unable to determine how risky you are – because they don’t know how likely or unlikely you are to pay them back.
This makes them reluctant to give you credit/loans.
If banks choose to be conservative (like now, due to the Covid situation), they may choose to deny you access to credit/loans entirely.
That means you may have to put your plans to buy a house/car on hold until a later time, and can cause a lot of disruptions to your life.
3: FRAUD PROTECTION
While the use of cards opens up the threat of identity theft, credit cards can actually protect you against fraud.
The thing about credit is that it doesn’t belong to you – it belongs to the bank.
So if someone were to steal your credit card information and make a bunch of purchases without your consent, it’s the bank’s money that’s being spent, not yours.
When you discover that there are unauthorised purchases showing up on your statement, you can raise the issue to the bank to dispute it.
Most of the time, they will waive it off your statement, cancel your card and issue you a new card so that whoever has their hands on your credit card information can no longer use it.
Since you didn’t pay for those purchases, you haven’t lost any money.
We all work hard for our money, and the banks know that.
With the stiff competition among credit card companies, they will usually try their best to keep their customers – by doing you favours like this.
In contrast, if you were using a debit card, the money for those purchases would already have left your bank account by the time you find out.
Even if you raise a dispute to the bank, they may not be able to get your money back for you.
Just like that, your past week’s worth of salary has gone down the drain – buying food and clothes for the thief who stole your card.
4: FREE PERKS
Do you love free stuff?
If you do, that’s another reason to use credit cards.
Credit cards come with a plethora of complimentary benefits and services which can save you money and time.
This is one of the most common benefits offered by credit cards.
If you book your flight with a credit card, you may be eligible for free travel insurance from your credit card company.
This travel insurance is often extended to your family members who are travelling with you as well, but not to friends.
The extent of coverage differs between credit cards.
Some only cover accidental death or permanent disablement, while others also cover travel inconveniences and hospitalisation bills.
Some credit cards also offer car insurance if you are renting a car overseas.
This can save you some serious cash, especially if you’re travelling to countries where travel insurance is expensive.
I would advise you to call your credit card company to ask them about all the insurance benefits they offer to decide if you need to purchase a separate travel insurance with wider coverage.
Another common benefit offered by credit cards is extended warranty on certain products.
Some products that are often covered under this extended warranty includes watches, luggage, TVs, computers, phones and other small appliances.
Note: In most cases, items will only be covered under extended warranty if the item has a manufacturer’s warranty.
While this may not be as useful of a benefit as compared to complimentary travel insurance, it could come in handy for expensive items such as TVs.
Instead of paying for extended warranty, you may already have free extended warranty at the courtesy of your credit card provider.
The List Goes On
Many miles cards come with complimentary lounge visits at various airports worldwide, allowing you to travel in luxury (or at least, wait in luxury).
Some cards also provide free hotel room upgrades or complimentary hotel stays when you meet certain criteria at partnered hotels.
Other credit cards, typically those geared towards higher income customers with annual income >S$100k, provide personal concierge services.
This includes making bookings and redeeming rewards on your behalf, or providing you with exclusive offers to attend events.
Credit cards allow you to:
- Earn miles/cashback while you spend
- Build up your credit score
- Get protection against fraud
- Enjoy many other complimentary benefits
All these will go a long way in helping you get the most out of what you are already spending.
Again, only use a credit card if you can control your spending.
If you misuse a credit card, it will do you much more harm than good, and that defeats the purpose of using a credit card in the first place.
However, don’t let this scare you from using credit cards – you just need to be responsible.
If you are able to use credit cards well, they will be an extremely valuable asset in your financial toolkit.