There are many reasons why people find themselves having problems repaying their debts. Some may have overextended themselves by spending future money that was not there, perhaps due to a job loss or promises by a third-party not being fulfilled. Others may have borrowed to fund their businesses. Gambling is another huge root cause of unsurmountable debts.
Regardless of the reasons for getting into debt issues, the key thing is to acknowledge you have a problem, and then formulate a plan for tackling it. Declaring bankruptcy is probably last thing you want to do, at least not until you exhaust all available debt management tools available to you, as outlined in this article.
This process can take months, or even years, so be patient and know that with each repayment you make, you are one step closer towards being debt-free.
# 1 Make A List Of All Your Outstanding Loans
Before you can plan on the best course of action to tackle your debts, you want to know exactly how much you owe each creditor. You can purchase a copy of your current credit report to understand how much exactly do you owe.
It might sound obvious, but you should also avoid adding even more debt to your name. When you’re already saddled with $40,000 worth of debts, adding another $2,000 doesn’t seem like much. But at the tail end of your debt-clearing journey, that $2,000 might mean another 2 or 3 months before you can reclaim your debt-free life.
# 2 Balance Transfer
Most credit card companies offer this service known as balance transfer. It allows you to consolidate what you owe to multiple credit card companies (at high interest) with one lender, at lower or even no interest, though a flat administrative fee (around 2%) may be levied.
In addition to simplifying your repayments, it also stops the interest you owe on your credit card bills from snowballing.
Balance transfer repayment have interest-free periods range from 3 to 12 months, after which hefty interest will kick in. As with credit card bills, there are minimum amounts of repayments you need to pay each month, failing which you will also be slapped with late payment fees.
Thus, you should only take up a balance transfer if you are confident in your ability to clear the balance transfer amount within the interest-free period.
# 3 Talk To Your Bank
Despite their reputation for being cold, uncaring institutions (especially when you owe them money), banks may offer alternative options for you to settle your outstanding credit card bills and unsecured debts through instalments.
It is not in the bank’s interest (pun not intended) that they earn more money from you theoretically when you have no real ability to repay and are at risk of defaulting.
# 4 Pay Off Your High-Interest Debts With A Lower Interest Loan
The effective interest rate for personal loans is around 8 to 10% p.a. This is lower than the one your credit card debts, which is much higher (over 20%).
Also, personal loans have a duration of between 1 year to 5 years, which means you get a longer runway to pay off your debt and have a more reasonable monthly repayment amount.
# 5 Pay Off Higher Interest Debt First
If managing your debts with a balance transfer, debt instalment plan, or a personal loan is not possible, then the next thing you can do is to plan the order and amounts in which you will make your debt repayments. With limited funds each month, you want to ensure you deploy them as effectively as possible.
Not fulfilling minimum repayments can be very costly, so you should prioritise not getting slapped with those extra fees. The balance of your funds should be channelled towards clearing the debts with the highest interest.
While you want to clear off debts as fast as you have cash, you should also look out for any early-repayment penalties (for certain loans).
# 6 Apply For The Debt Consolidation Plan
If you have unsecured debts (credit cards and personal loans) that exceeds 12 times your monthly income, you may be eligible for a Debt Consolidation Plan (DCP).
This is an initiative by the Association of Banks in Singapore (ABS) that allows you to consolidate what you owe across different financial institutions with one of the 14 DCP participating institutions at a lower interest rate, with a schedule of fixed monthly repayment sums payable until you fully repay all your outstanding balances.
Note that when you sign up for DCP, all your existing unsecured credit facilities will not be operational, and you will not be able to obtain new credit facilities, unless the loans are for education, medical or business purposes.
You would be allowed one credit card with a credit limit of one month’s income to manage your daily expenses and cashflow.
# 7 Seek Credit Counselling
If all of the above debt management tools fail, you can approach Credit Counselling Singapore to seek help and advice in resolving your debt problems.
They can provide advice, encouragement, and link you up to resources that can help you on your journey to becoming debt-free.
As you can see above, there are multiple tools available to help you tackle your debt problem. This journey will span over months and even years, so once you have worked out a plan, be patient and live as best you can with the knowledge that you are on top of things.
See you on the other (debt-free) side!