Credit cards get a bad rep. Sometimes it might seem that the best course of action is to steer clear of them altogether. Yet if you do, you might end up missing out on cashback, interest gains and other perks.
Vipin Kalra, Vice President and Managing Director at Diebold Nixdorf, showed Tigerhall members how to strike a balance at his Private Tigerhall Talk. Below are some of the key tips he shared on the night, for you to use when it comes to credit cards.
Use Credit Cards Like Debit Cards
Late payment interest from credit cards is one third of a bank’s revenue. The reality is that 50-60% of people are forgetting to make their credit card payments or have spent beyond their means and are struggling to pay back the due amount within the first month. So, they end up paying interest at around 20-30% of the amount that was due.
And this is why banks can afford to offer great perks. Their earnings from interest far outweigh the freebies and cashback that they’re offering.
So, Vipin emphasises, you need to do your math.
Don’t borrow beyond your means. If your expenses are more than 50% of your income, before you use a credit card, then you need to set a budget for your discretionary expenses which many people underestimate. Also you need to keep track of your billing cycle and always try to pay off your balance within 30 days.
Retrieve Your Credit Score
No credit history is not good news.
There are several things that impact your credit score, and it’s the score that banks use to make decisions on what products and rates to offer you. You need to show that you have been paying your bills on time and don’t have any type of black mark on your record for missed payments.
You can clock a positive history if you borrowed for 10 years, but repaid in 7 years. Or if you are a premium customer in another bank with a high credit limit.
The best way to know your credit score is to go to the credit bureau of your country and ask for a credit report which is usually less than 10 SGD.
But here’s the thing, you don’t want to be pulling your credit score too often or it’ll lower your credit score!
Why? If your credit score has been pulled multiple times, it seems like you’ve asked many banks for loans which makes you seem desperate and therefore you’ll get scored lower.
Tackling Your Behavioural Scoring
Next, be aware of your behavioral scores – which is derived from your in-app and online behavior. Behaviors include how often you’re using your phone, apps, getting taxis, travelling and even your shopping habits. Banks are looking for patterns to predict signs of financial stress.
It’s too late to try to protect your details from Facebook or Instagram. The damage has been done. What you can do now is to be aware of what online behaviors can do for your scoring.
If you’ve gone from spending extravagantly to saving significantly, it indicates some financial stress. If you switch from Deliveroo to McDonalds or not even order food online at all, that could indicate financial stress. Of course, you may be doing this to save more which may or may not be captured by data.
There are also some unrelated behaviours in predictive modelling. For instance, travelling on Grab between 3-5pm is correlated to a high chance of default on payments. It could be a fluke in the data or it could be tapping into a way that people think and behave.
Getting a Loan for Your Property Investment
Even with a good income and prompt credit card payments across multiple banks, your request for a loan could get rejected. When banks are assessing you, they take 10% of your credit limits for various cards and this is calculated as your liability even though you aren’t using the credit card. So, it’s smart to cut down on the credit cards with larger cashlines if you’re going to take a loan.
But that’s not all.
Vipin was once rejected from a loan for his 4th property despite being the Country manager of Visa in Australia. He had a good income, 3 properties, and what he thought was a good credit score. He found out later that when he relocated from Singapore to Australia, he was receiving levy letters at his Singapore address, unaware of $1000 outstanding. That simple mistake went on his record.
The key to outsmarting credit card providers is to actively think about your finances and make decisions that will help you in the long run.