This article was contributed by Credit Bureau Singapore and edited by The Blue and Gold.
Just a decade ago, we were still paying through our physical bank cards, paper notes, and coins. Today, regardless of whether we purchase from our favourite hawker, small convenience stores around our neighbourhoods or even big retail shopping malls, each vendor offers many different ways for us to make our payments. With all these fast-emerging new payment providers out in the market, it is important to know the two basic ways of spending on Debit and Credit terms.
What is Credit?
In simple terms, credits are money you use on borrowed terms which 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, 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 of Paying on Credit Terms
Most credit facilities, especially credit cards, come with an interest-free period before your account is due for payment. This comes in handy when you need to pay for large purchases but you do not have sufficient cash on hand to pay immediately. Many companies are also offering an alternative to convert your payment dues into affordable instalments with a low interest fee. You can also apply for personal loans to pay for urgent tuition fees or medical bills. Beyond the usual banks and financial institutions, many retail merchants are also offering a Buy Now Pay Later (BNPL) scheme that allows you to make your purchases and repay them over a period of time with no interest. With the various number of credit providers and products in the market, you can easily choose a credit facility that is the most suitable for your lifestyle.
Cons of Paying on Credit Terms
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 for locals. Credit providers 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. Secondly, if you are not prudent in managing your spending, you can easily overspend your budget, accumulating bad debts over time if you are unable to pay back on time.
What is Debit?
Debit is more straightforward. Debit means 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). They are usually paired with debit cards or ATM cards that you can use when making payments at the counter.
Pros of Paying on Debit Terms
Almost all Singapore merchants widely accept payment via debit carriers. The most common payment method now is ‘PayNow’ whereby you can easily scan a QR code and transfer funds to the merchant’s bank account. Another perk is the low barrier of entry — anyone can 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. Many banks in the industry are also becoming more competitive as they try to entice you to open a CASA account with them through attractive freebies promotions or exclusive perks.
You can only spend what you have in your account. Payment transactions via debit accounts are usually deducted immediately.
Regardless of whether you are intending to apply for credit facilities in the future, it is important to practice prudence wherever you can so that you are always financially prepared for any upcoming challenges ahead in your life.
Lastly, be sure to follow Credit Bureau Singapore on Facebook for more useful content and tips on how to maintain a good credit reputation. To check your credit score, you can purchase a copy of your credit report at https://www.creditbureau.com.sg/.
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