Tuesday, May 27, 2008

Choosing credit cards (in Singapore)

In Singapore, many people carry multiple credit cards. This is due in no small part to the aggressive credit card promoters and promotions that encourage people to sign up for every new piece of plastic peddled by the banks out there. So which card to sign up for? I hereby declare that I make no recommendations as to which cards are the 'best', since what works for one person may not work for another. What I am going to talk about are a set of guidelines that I use to pick my credit cards, and as far as I know, the guidelines I use are fairly uncommon, or at least not talked about often.

All the conventional wisdom of credit cards applies

Anyone picking up an (USA-centric) book on personal finance will find the advice familiar. Pick cards with low interest rates, try to pay off your balance each month, never use cash advance facilities unless you desperately need the cash because they're expensive and interest starts accruing immediately etc.

That said, discard the advice that is immediately irrelevant

That means that if you're like me and pay off your balance completely each month, you can ignore interest rates as a comparison measure between credit cards, because the interest rate is irrelevant. Be what the credit card industry calls a 'convenience user'. The same applies for cash advance fees and interest rates; completely irrelevant if you never use cash advance facilities.

Never pay annual fees

Singaporeans will be familiar with this, even though almost all credit cards on the market ostensibly carry annual fees. All it takes is a phone call to customer service to threaten a card cancellation and the annual fee will be waived for that year. The cost of acquiring a new customer is more expensive than retaining one, so banks will always acquiesce. The catch is that many banks reduce or cancel away reward points for annual fee waivers. This isn't surprising as fee waivers are built into the reward system as a possible redemption award.

There are only a handful of cards on the Singapore market that expressly state that they do not have annual fees. Most of these are associated with priority banking programs (anyone with SGD200000 to spare?). So if you have one of those, rest assured that you're already more than paying the annual fee with the fat-margin business you're providing the bank.

The value of rewards and credit card perks is tricky to calculate

Anyone who travels frequently will be familiar with the airline equivalent of this: frequent flier miles are difficult to value [rule of thumb used to be 1 mile = 1 US penny, but with oil at USD135 and airline cutbacks, all bets are off].

The first important measure to look at for credit card rewards is the duration that reward points are valid. There's no point (sic) applying for a card with juicy rewards if you know for a fact that you're unlikely to charge enough on the card in 1 or 2 years (the typical duration for most cards) to redeem for those rewards.

The second important measure is to consider merchant discounts associated with (co-branded) credit cards. If you would spend your money at those merchants anyway, then the credit card is usually a good product to choose. If not, getting the card for the discounts is not a good reason to alter your normal patterns of spending. You'll only be wasting money on unnecessary purchases. And complicating your credit card management, which could lead to late fees or interest charges if you don't pay off your balance promptly.

As a corollary, like frequent flier miles, consolidation of spending on one or two cards is the most efficient way of accruing points quickly. So consider choosing cards that give the best discounts or rewards for the broadest range of your normal expenditure.

The third important measure to look at for credit card rewards is:

Reward Ratio = Redemption value of an reward that you actually use / Spending needed to accrue that reward

So if a $40 gift card/voucher at your favorite book store requires 1600 points, but if one point requires $5 in expenditure (and not 'spend', as most banks are wont to call it, nouns versus verbs people!), the reward ratio actually works out to 0.5%.

Reward ratios are generally higher for less popular merchant vouchers/store credit, and lower for more popular ones, and lower still for cash credits given by the bank itself. Balanced against this is that merchant vouchers typically cannot be combined with existing discounts or promotions, while cash credits apply everywhere. Also, remember to compare like for like when comparing reward ratios between credit cards.

In the Singapore market, reward ratios range mostly from about 0.3% to 2% for general categories of spending. Some cards give cash rebates for spending at specific merchants or restaurants, and these can be particularly high (2-5%). However, as stated previously, do not allow the accrual of reward points to influence your normal patterns of spending. A credit card is a convenience tool, not a reward point generator. The reward points are an incidental benefit. Always remember that.

There are some fees that you should check on

One charge that very few people in Singapore check on, and practically every customer service officer in Singapore that I've spoken too is unfamiliar with as well, is the charge for overseas credit card transactions.

Signing for purchases outside your home country while travelling is normally not a bad idea (except in developing countries where credit card skimming is a real issue), because the purchase is insured automatically, and the currency conversion rate is favorable, since it's typically an interbank rate and not a street rate. The catch is that Visa or Mastercard levies a charge on the bank, which in turn passes it on to you, sometimes together with an extra charge of its own. This charge is frequently not transparent, as it is built into the exchange rate itself, but sometimes banks do disclose it. 1% is ok, 2% is not so ok. Check with the bank. Even with the charge however, sometimes the interbank exchange rate is still better than the street rate, particularly in developed countries.   

So those are my guidelines. Some of you might wonder out of curiosity which credit cards I carry, given the complicated set of guidelines I use to inform my choices. Well, as I've said, I'm not making recommendations. But for the curious, I carry just 2 credit cards, which is a rarity among many Singaporeans. I won't explain why, since that's just too long and personal, but the two cards I carry are the POSB everyday card and the ABN AMRO Switch card. As an aside, I carry also the Citibank ATM/Debit/EZ-link card and the ubiquitous POSB ATM card with the NETS facility.

Note: ABN AMRO's consumer banking business in Singapore has been acquired by Royal Bank of Scotland. Given the banner ads RBS has placed in the arrival hall at Changi Airport, I'm expecting some serious rebranding to happen soon, so ABN AMRO credit cards may be discontinued in the near future.

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