SINGAPORE: The option to make credit card minimum payments may seem like a financial lifeline, especially during times of temporary cash flow challenges. This alternative allows cardholders to maintain their privileges by settling a small upfront payment, along with interest charges on the outstanding balance, to be paid the following month. While this can help avoid late payment fees if paid promptly, there’s a critical downside that many may overlook.
According to SingSaver, paying just the minimum amount each month can quickly turn into a financial difficulty, particularly when it comes to the Total Debt Servicing Ratio (TDSR). This ratio, affecting one’s ability to secure a mortgage or car loan, takes a hit when credit card minimum payments enter the picture.
What is TDSR?
For those unfamiliar with TDSR, it’s a percentage of your monthly income, usually capped at 55%, allocated for repaying debts. When you carry a balance on your credit card, the minimum payment is subtracted from your TDSR. Consequently, with each outstanding balance, your TDSR diminishes, potentially jeopardizing your dreams of owning a home or vehicle.
The minimum credit card payment landscape in Singapore varies across banks, generally set at 3% of the outstanding amount or a minimum of S$50, whichever is higher. However, the tricky part is in the details, as different banks employ distinct formulas for calculating this minimum. Referencing your credit card statement for the latest information is crucial.
Credit Card Minimum Payments in Singapore
The repercussions of paying only the minimum amount each month become clearer when delving into the mechanics of credit card interest. Credit cards typically charge around 28% per annum in interest, compounded daily. With a minimum payment of just 3%, this often means you’re primarily covering the interest charges, barely making a dent in the actual debt.
Here’s a list of the minimum credit card payments from various banks in Singapore according to SingSaver:
1. American Express
3% of the outstanding amount or S$50, whichever is greater. This includes overdue minimum payments, late payment charges, and any amount exceeding the credit limit.
2. CIMB
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- For CIMB Visa Infinite/Signature and CIMB World/Platinum Mastercard cards, it’s the higher of 3% of the outstanding balance or S$50, plus any outstanding overdue amount from the previous statement.
- For AWSM card, it’s the higher of 3% of the outstanding balance or S$15, plus any outstanding overdue amount from the previous statement.
3. Citi
1% of the current balance + 1% of any outstanding unbilled installment amounts + all interest charges + all upfront service fees + late payment charges, or S$50, whichever is higher.
4. DBS/POSB
3% of the statement balance or S$50, whichever is greater, plus any amount overdue and/or exceeding the credit limit.
5. Maybank
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- 3% of the outstanding balance or S$20, whichever is higher, plus any outstanding amount marked as “Past Due” from previous statements.
- For accounts over the limit: 3% of the credit limit plus the excess over the credit limit.
6. OCBC
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- S$50 or 3% of the Total Balance, whichever is higher, and any overdue amount.
- For accounts over the limit: 3% of the Total Balance plus the amount exceeding the Credit Limit and any overdue amount.
7. Standard Chartered
The greater of either S$50 or 1% of the principal (including any installments billed in the current month) plus interest, fees, and charges. This also includes the over-limit amount and any past due amount (if any).
8. UOB
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- 3% of the outstanding balance or S$50, whichever is higher, plus any overdue amounts.
- For accounts over the limit: 3% of the Credit Limit, plus the excess over the Credit Limit, plus any overdue amounts.
To illustrate, consider a scenario where a S$5,000 balance incurs a monthly interest charge of S$115. With a minimum payment of S$150, after two months, you would have spent nearly S$300, yet your outstanding balance would have decreased by a mere S$60. This is a clear indication that relying solely on minimum payments is an inefficient strategy for reducing debt.
Also, persistent reliance on minimum payments may lead to higher interest rates from some card issuers after consecutive months of carrying over a balance, leading to more debt.
While credit card minimum payments can serve as a short-term remedy, they should not be considered a sustainable solution.
Remember, it is best to pay more than the minimum amount whenever possible. Aiming to pay more than the minimum and looking for strategic financial solutions can lead to a healthier financial future, steering clear of the pitfalls associated with credit card debt. You can also consider covering your debt by taking a personal loan since they have lower interest rates compared to credit cards./TISG