You may have seen adults around you or even your own parents using cashless payment methods to pay for house bills and loans.
As students right now you might not be eligible to apply for some of these methods, yet it is also a common sight in Singapore to see people paying off their bills and purchases on debit or credit terms.
So how do they work? And what options are available to you now?
Debit Facility Option
Debits are usually linked to your Current Account or Savings Account (CASA) whereby these are assets or funds that you already hold in possession. In simple terms, if you pay by debit mode, you can only afford to spend within what you have. There are already a range of options in the market ranging from children savings accounts to student accounts.
Pros of Debit
Typically, the bank will issue a debit card together with your CASA, giving you the convenience to make online purchase and direct funds transfer to another payee. Debit cards will also allow an individual to withdraw cash from ATM machines and the minimum eligibility to open a CASA account is lower as compared to a credit facility.
Cons of Debit
Since debits are direct funds deduction off your CASA accounts, it may not give you the freedom to make frequent big-ticket items purchase especially if you do not have sufficient funds on hand. Even so, CASA will allow you to grow your wealth by earning interests with the banks instead of stashing your wealth away in your closet.
Credit Facility Option
Credit accounts on the other hands are liabilities that you will need to pay for eventually. Credit providers will evaluate a borrower’s lending capacity limit before deciding how much money the company is willing to extend out to the borrower. Credit providers will tend to consider certain factors such as the borrower’s risk profile and annual income before they decide on the maximum loan to disburse or the maximum credit limit to assign. This means that the individual is only able to use up to the approved credit limit that he or she is given, and the credit limit will decrease as new purchases are transacted into his credit facility.
Pros of Credit
Credits especially can come in very handy or especially when you are in need to pay off a large purchase and you do not have sufficient cash on hand to pay up immediately. Retail banks and major financial institutions, also known as credit providers, will usually offer a wide range of credit facilities with simple repayment terms that will cater to every individual needs. Some commonly known products in the market are Credit Cards, Personal Loans, Mortgage loans and Vehicle loans.
Cons of Credit
These credit facilities often come with penalties such as late or interest fee if the individual fails to pay up the outstanding amount before the due date. There are instances when some individuals might eventually end up in a big debt if they refuse to pay up what they owe. Individuals who generally have less discipline over their own finances are less encouraged to use credit as this might lead to large delinquent payments which will have a negative impact on their credit reports.
What is a Credit Report?
A credit report is a comprehensive record of your credit payment history compiled from different retail banks and major financial institutions (FIs). CBS collects such credit data from the contributing members in this list. A credit report will display all credit-related data of the individual, displaying vital information such as the total credit limit disbursed, the types of credit or loan facilities applied, the amount of overdue balances that the individual owes and even public information like litigation charges and bankruptcy proceedings.
Consequences of Abusing Credit
Credit providers uses the CBS credit report to conduct credit assessment of an individual. Credit providers review the report and evaluate the likelihood of the consumer repaying before extending a loan out to him/her. This helps the lender to mitigate the risks of borrowers defaulting future payments. The consequences to having a poor credit report can be dire especially if you are planning to make very important life-changing decisions such as moving into a new house, paying for education fees or even starting up a new business. You will have to seek for other alternative means to look for additional funds which might also mean that you will have to consider re-planning your finances, possibly delaying your future goals or even building your wealth.
If all these financial terms interest you, you can consider our accounting and finance courses. Last but not least, follow Credit Bureau Singapore’s (CBS) Facebook for more finance related topics as well as personal tips on how you can maintain a good credit reputation!
TOP