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The importance of paying credit cards on time
20 Jul 2023
Credit cards can be a source of debt troubles. Here are four important points to help you understand why it's important to pay on time and not a carry credit balance.
1. Pay attention to total monthly debt payments
Many financial advisers suggest that your total monthly debt payments — including mortgage, personal loans, student loans, and credit card payments — shouldn't add up to more than one-third of your income. If you are near that number, you might need to pay down other loans or avoid additional credit card purchases.
2. Keep a good credit score
The latest Fidelity Global Sentiment Survey1 reveals that 56% of Hongkongers own debts. Additionally, the previous Financial Wellness Survey2 indicates that 21% of Hong Kong respondents do not repay their credit card balance in full. Keeping a good credit history is very important as financial institutions check your credit report when you apply for new mortgages, loans and other credit cards.
Credit reports contain information about an individual's credit history. Information such as your current credit usage, your repayment history, public records such as litigation regarding debt recovery, bankruptcy and winding-up petitions are all included and used to calculate your credit score.
If your credit history shows you have a solid bill payment history and low non-mortgage debt, your credit score will be higher. It will give a credit provider higher confidence in approving your loan application. In contrast, a poor credit history will lead to a low credit score which may result in higher interest rates or your application may even be declined.
3. Know how much your credit costs
Credit card loan is an unsecured loan and there is nothing the bank or card issuer can collect from you if you’re late on a bill. Because of this lack of physical collateral and potentially higher risk, financial institutions often charge a higher interest rate.
In Hong Kong, Annual Percentage Rate (APR) is used to calculate credit card interest rates. It usually hovers between 30% to 40% per annum on credit card balances. Therefore, you shouldn’t underestimate the cost of credit.
Making the minimum payment on credit cards can leave you in debt for years. By paying just the minimum payment a credit card balance of HK$10,000 at the APR of 35% (a monthly rate of 2.53%) with a minimum required payment HK$300, would take more than 5 years to pay off. Your total payments would equal about HK $20,582 — which means you'd pay extra HK$10,582 for over five years.
However, by increasing the payment up to HK$977, you would clear the debt in a year and cost HK$1,720 in total interest.
4. Read your credit card statement
Our survey also revealed that missing a credit card payment deadline or forgetting the total balance amount are the major reasons that Hong Kongers delay their credit card payment. To avoid this, it’s important to check your monthly credit card statement.
Information including payment due date, credit limit, minimum payment amount, finance charge, late charge, annualized percentage rate are stated clearly in the statement. Nowadays, an online bank account or bank mobile application allows you to check the statement easily and instantly.
1 Fidelity Global Sentiment Survey’ s data collection, research, and analysis for the above markets were completed in partnership with Opinium, a strategic insight agency. Data collection took place between August 2022 and September 2022. The sample consisted of 20,000 respondents (1,000 respondents came from Hong Kong) with the following qualifying conditions: Aged 20-75; Either they or their partner were employed full-time or part-time; A minimum household income of: Australia: A$45,000 annually; China: RMB 5,000 monthly; Hong Kong: HK$15,000 monthly; USA: US$20,000 annually; Canada: CA$30,000 annually; UK: £10,000 annually; Mexico: $4,500 MXN monthly; Ireland: €20,000 annually; Germany: €20,000 annually; Netherlands: €20,000 annually; France: €20,000 annually; Italy: €15,000 annually; Spain: €15,000 annually; Japan: 3m yen annually; Brazil: R$1,501 monthly; India: 55,001 annually; Singapore: SGD$2,000 monthly.
2 Fidelity’s Financial Wellness Survey consisted of respondents with the following qualifying conditions: individuals aged 20-75 years old; working full-time or part-time or have spouse working full-time or part-time; expecting to retire someday; the main financial decision maker or equal joint main financial decision maker in the household; a minimum household income of: United Kingdom: £10,000 annually; Germany: €20,000 annually; China: RMB 5,000 monthly; Hong Kong: HK$15,000 monthly; Japan: ¥3,000,000 annually; Canada: CA$30,000 annually. The research and analysis were completed for the United Kingdom, Germany, China, Hong Kong, Japan, and Canada. Data collection was completed in partnership with Ipsos, a global market and opinion research specialist, who collected and collated data for each region between March 2020 and May 2020.
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