Contributed by Credit Bureau Singapore
With the rapid digital evolution of various payment methods, as well as the enticing promotions that often come along with it, things can get confusing. So, as a Gen Z, it is important to know the two fundamental ways of spending – Debit and Credit!
WHAT IS CREDIT?
In layman’s terms, Credit is money you use on borrow terms and these are amounts that you will need to repay back eventually, including any interest charges that the bank has imposed onto you. When you apply for a credit facility through credit providers such as banks and major financial institutions (FIs), you will be given a credit limit of the maximum amount that you can spend until you have repaid back most of what you have owed. Credit facilities can be generically classified into Unsecured and Secured credit lending. Some of the commonly available credit facilities offered in the market are Credit Cards, Overdrafts and Personal Loans.
Pros and Cons of paying on Credit Terms
PROS
You can charge the transactions onto your credit account first and you will be given a free-interest period (typically 20-30 calendar days) before your account is due for payment. Being able to use credit can also come in very handy when you are in need to pay for large purchases when you do not have sufficient cash on hand to pay up immediately. For instance, you can take up personal loans to pay off your school fees, medical bills and even for a mortgage purchase. Different credit providers will be able to offer a range of products ranging from high or low interest rates. With the various number of credit providers and products in the market, you can make easy comparisons to choose the best loan repayment package for you!
CONS:
Not everyone is eligible to apply for a credit facility. For instance, if you wish to apply for an Unsecured Credit Card in Singapore, you must be at least 18 years old and meet the minimum annual income criteria of at least $30,000. Credit providers like banks and major financial institutions (FIs) will also evaluate your repayment capacity before deciding how much credit limit or loan the lender is willing to extend out to you. Credit providers will still need to consider other factors such as your risk profile by referring to the Credit Bureau Singapore’s Consumer Credit Report for a thorough credit assessment. Another downside could be that if you are not prudent in managing your spending, you can easily overspend on your own budget. This can result in accumulative bad debts over time if you are unable to pay back on time.
WHAT IS DEBIT?
Debit is even more straightforward; it is as easy as understanding that you can only spend whatever cash you have in your bank account at that point of time. Major debit accounts available in the market now are your Current Account and Savings Account (CASA) and they are usually paired with Debit Cards or ATM Cards that you can use when making payments at the counter.
Pros and Cons of paying on Debit Terms
PROS
Low barrier of entry; anyone will be able to walk-in to a bank with your legal documents to open a bank account. However, depending on the type of account you wish to apply for, some banks might require you to deposit a minimum amount of fresh funds. Otherwise, the bank will deduct a small administrative fee every month if the money in your bank account falls below the minimum balance amount.
CONS
You can only spend what you have. You will be very limited to how much you can spend, especially if you do not have a lot to begin with. Payment transactions via debit accounts are usually deducted immediately. For instance, if you have $100 in your account and you paid for $90 of goods, you will be left with $10 only until you deposit fresh funds into your account again.
No matter if you are intending to apply for credit cards in the future or you are currently at which stage of life now, it is important to practice prudence wherever we can. This will ensure that we are always financially prepared for any upcoming challenges ahead in our lives.
Lastly, be sure to follow and like Credit Bureau Singapore on their Facebook page @creditbureausingapore, or visit https://www.creditbureau.com.sg/ for more useful content and tips to maintain a good credit reputation!
