3 pitfalls of choosing the wrong credit card

For many people, the convenience of not needing to carry a thick wallet filled with cash is often a good enough of a reason to have a credit card.

Others just get whatever credit card their friends recommend, without really considering how such a card fits into their own unique set of needs.

However, believe it or not, choosing the wrong credit card can easily cost you hundreds of dollars a year. A card that works well for your friend may not always work out well for you.

Mismatch of rewards and spending habits

Let's say your friends all use the Citi Cashback Credit Card, and recommended you do as well as it's the best deal you could possibly get. Thinking your current set of credit cards is suboptimal, you get the Citi Cashback Card.

What you may not have realised when doing this, however, is that, while the Citi Cashback Card is easily considered one of the best cash back cards in Singapore, it is actually not that great unless you spend mostly on food, and not on other things like travel, entertainment or shopping. In other words, the "best" credit card for you really depends on how you spend your money.

The Citi Cashback card provides 6per cent cashback on all of your dining and grocery expenditures. However, for almost everything outside of these two spending areas, it only provides 0.2 per cent of cash back.

Therefore, if you are spending about S$600 per month on food, but S$1,400 on other things, it will only earn about S$38.80 of cash rebate for you (do note that you can earn a lot more if you have a car and purchase petrol).

If you have a more diverse spending habit outside of dining and groceries, a card like OCBC 365 with a more diverse set of rewards could be more beneficial.

For example, OCBC 365 card's cashback programme spans petrol, dining, groceries, online shopping and even streaming services. It's also worth pointing out that OCBC 365 card waives its annual fee for anyone who spends S$10,000 on the card every year, a feature the other card lacks.

Mismatch of spending amount

How much you tend to spend every month also influences which card you should be using. For instance, the UOB One Card, easily considered one of the best cashback cards in the country, requires a minimum spend of S$2,000 monthly to qualify for its S$200 of quarterly cashback (up to 10 per cent). If you spend less than that even for one?out of three?consecutive months, you only receive S$50 or S$100 of cashback.

Given that UOB One Card charges an annual fee of S$196.20 (waived for one year), you could do much better with a card like the UOB Absolute Cashback card, which provides 1.7per cent of cash rebate no matter how much you spend.

Rewards credit card gone bad

Another scenario in which an otherwise great credit card could cost you money in the long run is when your spending power is not sufficient for the card's reward system.

The UOB One Card, for one, doesn't even give you anything if you spend less than S$500 on the card per month. Even worse, if you spend out of your budget for too long just to earn rewards, it could lead to your financial ruin.

The UOB PRVI miles card, on the other hand, though highly rewarding, requires you to incur S$1,000 of overseas spend per month in your first two?months of getting the card and pay the annual fee to get the 50,000 bonus miles.

Given that credit card debt carries an average interest rate of 26 per cent in Singapore, spending more than you can repay can lead to a substantial amount of credit card debt that will cost you dearly.

Therefore, you always have to be very familiar with the minimum spending requirements of the credit card that you are using, and manage it to a level that you can easily repay in full at the end of every monthly billing cycle.

A rewards credit card is only good for you so long as your budget can handle it; both of these cards can be phenomenally rewarding so long as you don't spend outside of your means.

Parting thoughts

Contrary to what many people believe, there is no single "best" credit card. In fact, even the few that are considered the best are not ideal for anyone.

When you are choosing your next credit card, be sure that it fits very well with your monthly budget and spending pattern. You should always be spending within your means.

Otherwise, you run the risk of racking up a credit card debt that will cost you a significant amount regardless of how much cash back or miles you are earning on the card.

ALSO READ:?Why you should not hoard your credit card rewards

This article was first published in ValueChampion.