As a credit card user, the biggest question you have to answer is how effectively can you manage your credit card bills. Sometimes you may want to buy something that exceeds your monthly budget but can be covered by credit cards. This is where you might consider opting for the attractive-sounding 0% instalment payment plan, also known commonly as IPP. But the question is, is it a good facility? If yes, for what purchases should it be used?
Before we consider when and why to use this plan, let us try and understand how these instalment plans work.
Read also: 6 Tips to get out of credit card debt easily
How exactly does an instalment plan work?
The idea behind an IPP is to allow you to freedom to pay for certain large purchases in easy-to-handle instalments.
For example, say you want to buy an iPad Pro. Its 12.9-inch model with 256 GB space costs around S$1,340. This will probably push your credit card bill for the month up too high. You may also not be able to buy the iPad and pay your bill in full that month. Instead, your credit card company allows you to convert that purchase into instalments of 6 to 24-month tenures. So you won’t end up paying high interest rates.
Let’s say you have a DBS credit card and opt for a 12-month 0% Instalment Payment Plan. The total payment will get distributed into 12 equal instalments, which will amount to around S$111.67 per month. Of course, there might be certain other charges such as processing fee or service fee.
Additional reading: The 101 on Credit Card Interest and How to Avoid Being Charged
When to use the instalment payment plans
Now that we have an idea of what credit card instalment payment plans are, here are some situations where you can consider using this facility:
1. You have to make big-ticket purchases
When you want something beyond the means of your monthly salary, you obviously have to depend on credit cards. You aren’t going to break into your savings for that iPad, right? It’s possible that you may not be able to pay off your entire bill in the given month if that large purchase is added to it.
So instead of paying in full and incurring interest charges on the balance every month, converting the purchase to 0% IPP will help you save on interest charges. However, remember that if the 0% IPP is not offered by the merchant, and you have to apply from the bank (eg. OCBC PayLite), there are usually processing fees involved. These could range from 2% to 10% of the transaction amount.
2. You are okay with not earning rewards points or cashback on the purchases
Most cards won’t give you rewards points, miles or cashback on purchases that are converted into IPP. BUT, some credit cards will specify that IPP payments also qualify for rewards or cash rebates. For example, the Standard Chartered Manhattan World MasterCard and the HSBC Revolution Card allow you to earn cashback and rewards on payments converted to instalments as well.
3. You are all right with reaching the ceiling of your credit limit
Don’t think that because you are paying only a part of the price, only the instalment amounts are deducted from the credit limit. When you make a big-ticket purchase using the IPP, the total amount of the purchase is deducted from your credit limit. This will make it difficult for you to make too many transactions on the card for the next couple of months.
If you are absolutely fine with higher credit utilisation and even maxing out your credit limit, go for the instalment option. But don’t worry, as you pay off one instalment after the other, the credit limit is restored proportionately.
4. You don’t have the habit of paying only the minimum monthly payment required
If you have opted for an instalment payment plan for any transaction, then you can’t get away with paying just the minimum monthly amount required. You have to pay the exact amount under IPP for the given month, plus the minimum monthly payment for your total credit card transactions.
If you pay only the minimum amount required, then the regular credit card interest rate will be charged on the amount towards the IPP as well. Now, some banks may charge interest on just that month’s IPP amount, but some end up charging interest on the ENTIRE purchase amount. So be very careful about settling your monthly credit card bills.
Oh, and you also need to know…
If you have an ongoing instalment payment plan, you cannot close your credit card account. You have to pay off the pending instalments on the card before termination.
Also, if you decide in the middle of the IPP tenure that you want to pay off the pending amount and close the plan, then you will be charged a flat amount, usually around S$150, as early settlement fee.
Check this out too: What To Do When You are Unable to Make Credit Card Payments