Dang! The air-conditioner has broken down, and it’s going to cost you a tiny fortune to repair it. It’s already been used for 5 years, the repairman’s recommendation is that you just replace it with a brand new set. Sounds familiar? Then you’ll also know that these unexpected expenses are such a pain, precisely because it’s unexpected, expensive, and we have not budgeted for it.
But even if it’s an expected and large expense, like buying a Chanel bag or household appliances for your newly acquired apartment, it’s never easy plonking down a few thousand dollars in a single day.
So, the natural answer to this conundrum is to go for Interest-free Instalment Payment Plans, right?
That’s definitely one way to go about that, but like many things related to money, there are terms and conditions attached. Make sure you are aware of this before committing to an instalment plan. Read on to find out.
5 things you need to know about your credit card’s 0% Interest Instalment Payment Plans (IPP)
1. Most credit cards don’t offer points on IPP purchases
This is where you need to prioritize; If you have a rewards credit card, what is more beneficial to you? Earning points on your purchase or converting your purchase into an IPP and stretching out payments and forgoing your points?
Say you’re using your OCBC Titanium Rewards Card at Best Denki and have just bought a fridge, a washing machine and a vacuum cleaner for $2,500. Now, you can either split your purchases into affordable monthly instalments OR get a whopping 25,000 points on your purchase. It’s one or the other, you’re not getting both. Remember that!
2. You’re actually charged the full amount right from the start
Don’t go out to celebrate the fact that you purchased a swanky two door refrigerator on an IPP and only have to pay a small monthly sum. The credit card actually deducts the entire amount from your credit limit. As you pay your instalments, your credit limit returns to normal.
This can also cause serious problems if you’re looking for a loan. Since your credit card is charged the full amount of big-ticket purchases, your credit limits bear the brunt and any additional requests for credit can be met with a swift rejection.
For instance, if you apply for a loan while on an IPP, the lender will rethink your application for one simple reason – your TDSR (Total Debt Servicing Ratio). When on an IPP, since you’re still charged the full amount, your total debt-to-income ratio will increase and your available credit limit will decrease. Lenders usually reject applicants who have a high TDSR.
3. Beware of ‘admin fees’
Just because you’re not paying interest doesn’t mean you’re not paying anything extra. Banks may charge an ‘administration fee’ for converting your purchases into a 0% interest instalment plan.
These charges can hover around the 3 to 5% mark and while it may not be as high as the normal interest rates of credit cards, it can still make you question your decision of actually buying something or waiting till you have enough funds to cover the purchase.
Some merchants like Courts, Gain City or Harvey Norman may absorb the additional fees so you’ll only need to pay the total transaction value.
Thus, when opting for 0% IPP, make sure you check if there are additional charges that will be incurred.
4. Early settlement fees
Yes, just like loans, these 0% interest instalment plans have a penalty applied if you pay before the end of your tenure. Masked in the form of yet another administration fee, any attempts to restore your credit limit by paying off the instalments before the completion of the tenure can be met with penalties of as high as S$150 in the case of DBS credit cards.
5. Can’t cancel a card
This one’s a no-brainer. When you have an IPP on your credit card, you can’t cancel it without paying the outstanding balance in full. Should you cancel your card early, you’ll have to pay the ‘administration fee’ because it’s earlier than what the tenure states.
It becomes a problem when purchasing long-term services such as gym memberships. The infamous closure of California Fitness is a prime example. People purchased year-long memberships, converted into IPPs and although the gym is shut, the members are still paying instalments.
Interest-free instalment plans have their benefits that make items you buy more affordable. But misuse it and your credit score could take a hit. Your card gets charged for the whole amount up front, reducing your available credit limit. Lastly, reliance on IPPs can give way to impulse shopping sprees which don’t do your savings any good.