Credit Cards 101: How Does A Credit Card Work?

For many working adults, upgrading from a debit card to a credit card often signals a notable milestone in adulthood. Although both cards might look similar, you might be wondering, "How does a credit card work exactly? What sets it apart from debit cards?"

Besides the obvious distinction between debit and credit, credit cards provide a range of benefits that help you save money or earn rewards on both retail and non-retail transactions – like health or car insurance premiums, utility bills, education fees, and more. Moreover, responsibly using credit cards also builds towards a good credit score.

If all this sounds unfamiliar and confusing, don't worry. Keep reading and we'll take you through all the credit card basics you'll need to know.

A credit card allows cardholders to "borrow money" from the card issuer to purchase goods and services, pay fees and bills, and in some instances, even withdraw cash via cash advances. Of course, this owed amount will be billed to you for repayment at the end of each cycle.

Essentially, think of credit cards as a type of temporary loan.

In Singapore, credit card issuers include banks like Citibank, HSBC, UOB, OCBC, DBS/POSB, CIMB, Maybank, and more.

Traditionally, credit cards came in the physical card form but nowadays, thanks to the prevalence of mobile wallets, many offer digital versions too.

🤓 Fun fact: Digital card versions have become so popular to the point that some credit cards even specifically grant cashback, miles, or rewards points on mobile contactless payments (e.g. Apple Pay, Google Pay).

Unlike a debit card that directly deducts from your savings account, a credit card enables the cardholder (you) to borrow money from the credit card issuer (bank) up to a set limit for purchases, which you repay later.   

Each credit card transaction amount is deducted from the existing card limit until it's reached or the end of the billing cycle rolls around – whichever comes first. Typically in most cases, it's the latter.

A credit card's billing cycle varies according to the credit card issuer, either by statement month or calendar month.

At the end of each cycle, the card issuer generates a card statement detailing all transactions made during that period – displayed as your credit card balance. This owed amount is to be repaid by the due date lest you start incurring a hefty interest on the outstanding balance.

Note how we specified outstanding balance, and not just overdue balance?

Well, just because you can make a minimum payment on your credit card bill first and pay off the remainder later, doesn't mean you should. 👀

Failure to pay off your credit card balance in full incurs an interest charge ranging from 25% to 27% p.a. on the remaining balance, which will carry over to your next statement. Your credit card limit will only be partially restored by the minimum amount paid rather than to the full limit, thereby reducing the amount of credit available for you to spend on the next month.

Repeatedly only paying the card bill's minimum amount will accumulate unnecessary debt, credit card fees (e.g. late fees), and damage your credit score over time.

Meanwhile, paying off the owed balance fully restores your credit limit to the original amount and the billing cycle repeats as normal, with no interest incurred. 

💡 Pro-tip: Depending on your spending habits and preferences, you can opt for a cashback, miles, or rewards credit card.

The short answer? Just whip it out, and swipe or tap to pay. 🤭

The long answer? Learning how to use a credit card responsibly is more than that. 😰

Every credit card earns bonus rewards or rebates on select eligible categories. These categories are either fixed by the bank or decided by the cardholder out of several options.

For example, the Citi Cash Back Card earns up to 8% cashback on private commutes, petrol, dining, and groceries worldwide while the Maybank Family & Friends Card earns 8% cashback on five out of 10 preferred categories (e.g. Groceries).

Similarly, the Citi Rewards Card earns 10X Citi ThankYou Points or 4 miles per S$1 (mpd) on eligible online transactions. In contrast, the UOB Lady's Card earns UNI$10 per S$5 or 4 mpd on an enrolled category of choice (e.g. Travel) per quarter.

Meanwhile, all other retail spend will usually net you the base rewards or rebate rate (e.g. 0.4 mpd, 0.3% cashback). 

Thus, it literally pays to strategise which credit card to use for specific spending. To effectively do so, take some time to reflect on your spending habits.

Once you've identified your major types of expenses and applied for an appropriate credit card, you should start keeping tabs on your accumulated rebates and rewards.

Although it's not necessary to track your card rebates religiously, knowing how much you roughly have in the bank (no pun intended) is important to ensure your hard-earned miles and points don't expire before you get the chance to redeem them.

It could be as straightforward as setting up a monthly spreadsheet or a monthly reminder to check your account balance. 

💡 Pro-tip: Cashback tends to not expire, but miles usually do – except for a few travel credit cards. For example, HSBC Rewards points expire at the end of 37 months whereas Citi Miles never expires.

As seen in the previous segment, paying your credit card bills on time is not to be taken lightly. Only paying the minimum amount is not encouraged either, unless you don't have any other choice. 

But if it resorts to that predicament, you should probably re-evaluate your expenses and ability to afford a credit card.

Do you have an upcoming major life event, like a wedding or HDB BTO renovation, that requires serious funding? These are no doubt costly and usually involve a large sum of money.

In these situations, rather than relying on loose change or cash to cover these big-ticket purchases, credit cards such as unlimited cashback cards come in handy.

Poor credit card usage will negatively impact your credit score, but why? 

All your transactions or purchasing activities are recorded and reported to the credit card issuer through your credit card. In turn, this determines how banks regard you as a borrower. 

The Credit Bureau Singapore (CBS) is responsible for collecting and aggregating information of all participating members, including cardholders and card issuers alike, to inform the total credit risk profile of borrowers.

In short, your credit score consists of:

• Number of credit applications & amount of credit used
• Late payments on loans
• Duration of credit history
• Available credit
• Number of credit card applications and banks' inquiries

These combined factors will dictate the willingness of a financial institution to lend you money, and the amount lent.

Credit cards are great when you're in a pinch because they remove physical cash from the equation – allowing you to go cashless, pay for online transactions easily, and cover repairs or other unexpected costs.

We guess you can count them as part of your emergency fund plan. 🤷🏻

Credit card bills can be paid through various methods:

⭐ For step-by-step instructions, check out our How to Pay Credit Card Bills guide.

There are three types of credit cards in Singapore: Cashback cards, miles cards, and rewards cards.

Cashback cards are ideal for those who prefer the thrill of earning cashback or cash rebates on eligible spending to offset payments. These cards usually require a minimum monthly spend to qualify for their bonus cashback rate. 

Otherwise, your transactions for that month will only earn base cashback.

For example, the Citi Cash Back Card requires at least S$800 spend per month to earn its maximum 8% worldwide cashback on private commutes and petrol, and 6% cashback on dining and groceries.

On the other hand, its unlimited cashback counterpart – the Citi Cash Back+ Card – does not have any minimum monthly spend. Instead, all eligible spend nets a consistent 1.6% limitless cashback across the board, except for a few spend exclusions.

If you're an avid traveller and want your spending to contribute to your next holiday, miles credit cards are perfect for you. Each eligible transaction earns you bonus air miles (see: frequent flyer miles) and base miles on all other spend.

Miles credit cards like the DBS Woman's World Card and HSBC Revolution Card give 4 miles per S$1 (mpd) on select online transactions whereas travel credit cards like Citi PremierMiles Card and HSBC TravelOne Card give you 2 mpd and 2.4 mpd on foreign spend respectively.

Rewards cards are similar to miles cards since they often offer reward points which can be redeemed for airline miles. In essence, they double up as miles cards. For example, the Citi Rewards Card earns bonus 10X ThankYou Points on select online spend, which is equivalent to 4 mpd. 

Thus, rewards credit cards offer the flexibility to accumulate points for redeeming rewards or converting them into frequent flyer miles. 

At this point, we pretty much know how credit cards work but... do we know what's on a credit card? 🤔

On the front, you can expect to find the following personal information:

• Card Number
• Cardholder's Name
• Date of Expiry
• Credit card chip
• Credit card payment processing network (e.g. Visa, Mastercard, AMEX)

On the back, you can find its unique three- or four-digit card security code (CVV) which protects against credit card fraud. Every online transaction made with a credit card requires a CVV verification and prevents any unauthorized transactions from going through.

Each credit card demands different fee amounts and charges; but at their core, they share the same card fee classifications and charges.

⭐ For exact fees and charges per card, refer to our individual credit card reviews.