With a credit card on hand, users can shop conveniently and enjoy different merchant offers, and some may even use it for emergency cash flow. However, a survey conducted by the Consumer Council found that the annualised percentage rates (APR) of instalment plans, and cash advances provided by different credit card issuers varied vastly. Among the plans, the finance charge APR for cash advance was generally higher, from 5.9% to the highest of 47.97%. The Council reminds consumers that apart from interest, the costs of a loan could include handling fees and administrative fees related to the loan as well as charges on late payment or early settlement. Even if some plans were advertised to be "interest-free" or "no handling fees", different conditions/restrictions might apply, such as a minimum spending amount and fewer options for repayment periods.
The Council stresses that while borrowing from credit cards may seem convenient, significant interests might be involved. As such, consumers should not be too hasty in spending, cashing out or taking cash advances for the sake of convenience or solely being lured by claims such as "interest-free, no handling fees". If an instalment is not repaid on time, consumers might consequently bear a large sum of interest and late charges, resulting in debts snowballing due to piling up principal and interest.
In the survey, 21 card issuers were inquired on credit card loan services. Except for 2 card issuers who did not reply, information of a total of 69 loan plans was collected, including 30 merchant instalment/purchase instalment/ statement instalment plans, 19 cash instalment plans and 20 cash advances, in order to compare the terms and conditions of various loan services, including APR, loan limit, interest, handling fee, administrative fee, as well as the cost for early or overdue repayment, etc.
Consider the Cost before Borrowing – Interest, Handling Fee and Administrative Fee
A merchant instalment plan refers to an instalment arrangement by the merchant to the card issuer when a cardholder makes a purchase that meets specific transaction conditions (such as using a designated credit card, reaching the minimum transaction limit, etc.). In the 7 merchant instalment plans, 1 charged a monthly handling fee of 0.3% and a one-off application handling fee of $100 for plans with longer repayment periods (18 and 24 months); while the remaining 6 were interest-free and free of handling fee.
A purchase instalment plan refers to the arrangement to pay by instalment for individual transactions before being credited on the monthly statement, while a statement instalment plan refers to the arrangement to pay by instalment for the whole or part of the monthly statement balance. Both types of plans require cardholders to apply with the card issuer on their own. Furthermore, if extra cash flow is needed, cardholders may submit an application to the card issuer for cashing out the credit limit, and settle the monthly instalment within a fixed repayment period. Most of the purchase/cash instalment plans charge interest and/or handling fee.
Direct withdrawal of cash using credit cards at an ATM/bank branch is considered as cash advance. The loan limit is generally the available credit limit, without a fixed repayment amount or repayment period. The survey showed that most of the cash advance plans charged handling fees, from 1% to 5% for each cash advance amount, and the minimum handling fee was $100 in general. 6 plans charged an additional $20 to $200 for each cash advance transaction, or 2% of the cash advance amount as an administrative fee.
Large Disparity in APR among Instalment Plans
The APR may differ greatly among different instalment plans. Cash instalment plans have much higher APR than purchase/statement instalments. Taking a total purchase/monthly statement balance of $10,000 with 12-month instalments as an example, the APR of the purchase instalment and/or statement instalment plans ranged from 0.35% to 25.39%. However, if $10,000 was cashed out and repaid in 12 months, the APR of cash instalment plans ranged from 1% to 44.45%.
Moreover, 9 purchase instalment or cash instalment plans charged interest and/or handling fee based on the amount, with 6 plans charged lower interest and/or handling fee for higher loan amounts. Taking one of the card issuers as an example, the minimum monthly handling fees for cashing out less than $150,000, $150,000 to $300,000, and more than $300,000 were 0.23%, 0.15% and 0.13% respectively. Although the bigger the sum of loan, the lower the handling fee, the interest amount to be paid is much greater. As such, if consumers intend to take credit card loans, they must think twice before doing so.
Interest-free Period Bound by Terms and Conditions, May Not be Applicable to Cash Advances
Out of the 19 card issuers in the survey, 4 did not provide an interest-free period, and the remaining 15 provided a maximum interest-free period up to 53 days to 87 days for retail purchase. Nevertheless, interest-free period did not necessarily apply to cash advance. Only 5 card issuers provided an interest-free period of 55 days or 56 days for cash advances, while for the remaining plans, the interest would be calculated daily from the day of the cash advance transaction until the total outstanding amount had been fully paid off.
As for those interest-free and no handling fee instalment plans for purchase, specific loan conditions might be attached. For example, among the 69 plans, only 6 merchant instalment plans and 1 purchase instalment plan were interest-free and free of handling fees at the same time, with the latter only applicable to overseas retail transactions with foreign currency, or local retail transactions related to travelling overseas, as well as for a 6-month instalment only.
As for prepayments by credit cards, although under the credit card chargeback mechanism, consumers may seek refund once the merchant is closed, such chargeback may not be applicable to credit card instalment plans. Upon merchant closure, customers who pay by credit card instalments may find it difficult to redress their loss through this mechanism. Cardholders are generally still liable for continuing to repay the remaining balance by monthly instalment to the card issuer in accordance with the agreement.
Be Mindful of the Instalment Limit and the Repayment Period
Terms and conditions differ among different loan plans. For example, among the merchant instalment plans, the minimum transaction limit for instalment mostly were $1,000, while 2 plans were dependent on the merchant, and the repayment periods were between 3 months and a maximum of 36 months. The minimum transaction limit for purchase instalment and/or statement instalment plans ranged from a minimum of $200 to a maximum of $3,000.
The minimum cash out limit of all cash instalment plans ranged from $1,000 to $10,000, while the maximum of 5 plans was 90% or 95% of the available credit limit and that for the remaining plans was equal to the available credit limit in general. The repayment period could be from 24 months to 60 months, while 1 plan did not have a fixed repayment period or repayment amount, which were to be determined by the cardholder. For the 20 cash advance plans, the cash advance upper limit of 14 plans was the credit limit or a certain percentage of the credit limit, and 3 plans set a designated upper and lower limit on the cash advance amount.
Both Late Payments and Early Settlements Incur Additional Charges
After loan drawdown, cardholders must repay the statement balance on time. Otherwise, finance charge will be incurred, and the finance charge APR of cash advances was generally higher. Taking cash advance as an example, the interest is normally calculated on a daily basis starting from the day of the cash advance. For a cash advance loan of $100,000, with a monthly interest of 2.62% and a handling fee of 3.5% of the cash advance amount, even if the cardholder repay the whole statement balance of $106,120 on the first payment due date after the cash advance, because the statement date and the payment due date were often a period of time apart, the cardholder would still be charged for the interest from the statement date to the day of repayment in the next monthly statement; that is, an additional interest of $2,620 had to be repaid before the arrears of the cash advance was formally cleared.
If the cardholder failed to repay the minimum payment on or before the payment due date stated in the monthly statement, other than the finance charge, a late charge would also be imposed. The APR of late charge for purchase/statement instalment plans was between 10.21% and 44.25%. Card issuers generally base their calculation on the minimum repayment amount and set the ceiling at $230 to $350. Only 2 plans did not impose a late charge.
If the cardholder chose a longer repayment period, the cost for loan would naturally be higher. For instance, taking a purchase/cash instalment of $100,000 with a 6-month instalment period, the APR was 5.46% and the aggregated interest and charges were $1,560; while for a 24-month instalment, the APR was 6.04% and the aggregated interest and charges were $6,248; but if the cardholder could only pay the minimum payment monthly on time, though late charge could be avoided, the APR would be as high as 33.22%, and it would take more than 39 years to pay off the relevant loan, and the aggregated interest and charge ($247,364) could be as much as 2.47 times of the total loan amount.
If an early repayment was desired after taking a purchase/statement instalment or cash instalment from the credit card, plans mostly charged handling fees, with a fixed fee ranging from $150 to $500, while some plans would charge a certain percentage of the original loan amount or the handling fee for the remaining repayment period.
If cardholders opt for borrowing from credit cards, they should prudently consider their actual funding needs, relative costs for loans and their affordability. They should also take note of the following:
- If taking up credit card loans is not avoidable, cardholders should carefully choose among plans, make arrangements and apply to the card issuers as soon as possible. Never opt for cash advance just for the sake of convenience — though this may save application time, a higher borrowing cost will have to be borne;
- After purchase or taking up loans, statement balances should be settled on time; avoid only repaying partially or the minimum payment, which might lead to snowballing of the principal and interest, eventually making it very difficult to pay off;
- Depending on the regulations of individual card issuers, it may not be possible to pay some credit card transactions such as insurance premium and tax, etc., by instalment. Cardholders are advised to carefully read the terms and conditions related to the plan before transactions, or directly contact the relevant card issuer and check whether instalment plans are applicable to this type of transactions;
- Since the chargeback mechanism may not be applicable to credit card instalment plans, cardholders must pay attention to the terms on chargeback before signing any documents and only sign if they find them agreeable.
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