By Henry Ong

Question: I have been busy the past few days and I haven't bought my Christmas gifts yet for my friends and loved ones.

I am running low on my cash as I am also planning to host a Christmas party in my house and go on vacation next week.

Should I use my credit card to pay for my purchases?-Tonie by e-mail

Answer: Yes, you can use your credit card if you can afford to pay your balance in full when it falls due next month.

If you have the capability to raise the cash and settle your credit card debt without affecting your personal cash flow needs, go ahead.

However, if you are planning to pay your credit card balance by the minimum every month, you may be setting up yourself for financial trouble.

Credit cards are great source of free credit when it is used properly.

It offers a convenient substitute to carrying large amount of cash when you go shopping.

The key is to avoid tolerating credit card companies make money from you from interest charges.

When you pay the suggested minimum payment, you already agree to pay interest to them at an unreasonably high rate.

For example, there is one credit card company that charges interest rate of 3.25 per cent per month.

Do you know that this translates to 39 per cent a year?

This is huge compared to the average cost of money of the bank that pays only 0.5 per cent savings rate a year.

This same company offers you to pay super-low minimum payment of only 1 per cent of your credit card balance.

Imagine this, you pay monthly minimum of only 1 per cent that is not even one-third of your interest cost of 3.25 per cent. Does this sound like a good deal to you?

Well, beware.

If you follow this by paying the minimum, the difference will be simply added to your balance.

The longer it takes, the bigger your debt balance will become as your unpaid interest accumulates over the months.

In fact, for as long as the minimum payment is lower than your interest, it will take you forever to settle your debt fully.

For example, you spent P75,000 (S$2,221) for your purchases this Christmas and you plan to pay the minimum of 1 per cent or P750 every month on due date because this is what you can afford.

Do you know that if you pay this monthly for the next 30 years, your total credit card debt will balloon to P225 million?

You would have already spent P7 million on interest charges alone!