Purchases You Should Never Make With Your Credit Card
Credit cards can be a financial lifesaver. They can help you build up your credit score faster, earn membership rewards/discounts and provide you with an emergency source of cash when you need it.
Of course, credit cards can also land you in financial hell if you make the mistake of abusing them.
And if there’s one credit card rule you should follow, it’s this – avoid purchasing big ticket items with your credit cards unless you have the financial means to pay them off right away.
Here are some big-ticket purchases you should absolutely avoid making with your credit card:
The down payment on your mortgage
The biggest purchase you’ll probably ever make during your life is your first home. And for many young Singaporeans, home ownership is a complex challenge that requires plenty of financial planning.
Buying a property in Singapore, especially a condominium or resale Housing Development Board (HDB) flat, requires more than just finding the best possible home loan interest rate.
It requires a down payment of about 20%, 15% of which can be taken from your Central Provident Fund (CPF) account.
That leaves 5% that you must pay in cash – which can range from S$25,000 to S$50,000 on a S$500,000 to S$1,000,000 property. And using your credit card to cover that amount can be more expensive than you imagine.
Let’s say you use your credit card to pay your S$25,000 down payment.
Your credit card has a 24% Annual Percentage Rate (APR).
If you wanted to pay that S$25,000 by paying the minimum of 5% or S$50 each month, here’s what it will cost you:
- Total time to pay off: 11 years
- Total cost of using your credit card: S$41,289.79
Remember, just because you have a credit limit 3X to 4X your monthly income doesn’t mean you should use it all on your down payment.
Instead, take the opportunity to save up for your down payment by improving your finances this 2015.
Your new car’s down payment
Next to buying a home, the second most expensive purchase you’ll ever make during your lifetime is probably your car. Even on the “cheaper” end of the car buying spectrum, you can expect to pay at least $S100,000 for a brand new car.
However, in Singapore, banks won’t lend you nearly as much to buy a car as they would to buy a home.
Instead, the maximum amount of financing banks will provide for a car purchase is 60% if the vehicle’s open market value (OMV) is less than S$20,000 or 50% if the OMV is higher than S$20,000.
That means you’ll need to make a huge 40% to 50% down payment in cash!
Let’s say you wanted to buy a brand new Mitsubishi Lancer EX 1.6 at S$102,000 with an OMV of S$15,700. That means you take out a car loan for 60% financing but you’ll need to pay 40% down – which comes out to S$40,800.
You’re short on cash so you decide to put the whole amount on your credit card with a 24% APR.
If you wanted to pay that S$40,800 by paying the minimum of 5% or S$50 each month, here’s what it will cost you:
- Total time to pay off: 12 years and 4 months
- Total cost of using your credit card: S$67,623.09
Unless you have the cash on hand to purchase the car, it’s best to either settle for a used car that’s more affordable or stick to public transportation instead of resorting to your credit card.
School annual tuition fees
If you’ve read our article on whether it’s worth sending your child to an international school, you’d know that annual tuition fees could easily cost over S$25,000.
The reality is that it doesn’t matter whether you enrol your children in an international school, polytechnic or university – you still need to pay thousands of dollars to cover the annual tuition fees.
There are many ways to cover annual tuition fees if you don’t have the cash on hand, but using credit is by far the most expensive way to pay them.
You decide to put the cost of tuition fees for your daughter to attend Nanyang Technological Institute (NTU) during the 2015/2016 academic season on your credit card (24% APR) – which comes out to S$9,000 (School of Civil Engineering).
If you wanted to pay the S$9,000 by paying the minimum of 5% or S$50 each month, here’s what it will cost you:
- Total time to pay off: 8 years and 2 months
- Total cost of using your credit card: S$14,622.99
Instead of paying for tuition fees well after your child has already graduated, consider pursuing other routes such as using the CPF Education Scheme or taking out an education loan instead.
For big purchases – consider taking out a loan instead
Credit card interest rates can range from 15% to 28% APR, which can really turn a big money purchase into a financial ball-and-chain you’ll be carrying around for years.
If you really need to make a big purchase and don’t have the cash on hand, it’s wiser to take advantage of the lower interest rates offered by personal loans.
Our personal loan comparison page makes it easier for you to compare personal loan packages with interest rates as low as 7.20%, which can save you hundreds or thousands of dollars compared to using a credit card!