Credit and Loans
Watch your spending and avoid the credit trap.
You can improve your debt situation!
Spent too much time at work lately? You may well feel that you deserve to live it up, to grab that latest designer handbag from the Orchard Road boutique store, relax at a spa or indulge in a good meal at a nice restaurant.
But do think twice before whipping out your credit card or using your unsecured loans for your spending. If you can’t meet your payments on your credit cards or unsecured loans in full and on time, beware! Credit card debt can grow at an eye-popping rate of about 25% every year. Add late payment charges, annual fees and other charges to that, and you may find yourself drowning in a sea of debt, barely paying enough to cover the interest amounts.
Remember that only you can help yourself. The best way to avoid getting into excessive debt is to adopt good saving and spending habits and to live within your means.
Here are some tips on how you can adopt good spending habits and manage your finances wisely.
- Spend less than you earn.
- Draw up a budget for expenses. Be disciplined, stick to your budget and review your expenses regularly.
- Do not borrow to spend.
- Indicate your preferred credit limit when you apply for a new credit card or unsecured loan. Choose a limit which is sustainable
- Start saving as soon as you can – the earlier the better. Save regularly so that you don’t have to borrow for a rainy day.
- Pay yourself first i.e. save a fixed portion of your monthly pay cheque.
- Consider having separate bank accounts for different purposes (e.g saving, spending and receipts).
What can I do to improve my debt situation?
- 1) Obtain your credit report and assess the total amount of debt you owe.
- 2) Talk to your bank about converting the outstanding balances on your credit card and unsecured loans into a debt repayment plan where you can repay your debt by instalments.
- 3) Do not borrow from other sources to pay off your debts without comparing the interest charges and fees.
- 4) Refrain from charging more to your credit cards or drawing down on your unsecured loans. Give up your cards and your unsecured loans!
- 5) Pay the debts which incur higher interest first, but look out for penalties.
- 6) Approach Credit Counselling Singapore (6225 5227/ www.ccs.org.sg) if you need help to resolve your debt problems.
- 7) Consider applying for the Repayment Assistance Scheme (RAS) (6996 6006/www.ccsras.org.sg) if you have unsecured debts exceeding 12 times of your monthly income before 1 June 2015.
Repayment Assistance Scheme
Together with Credit Counselling Singapore, banks have introduced a debt repayment plan known as RAS in April this year to help indebted borrowers.
If you have interest-bearing unsecured debt of more than 12 times your monthly income before 1 June 2015, you may be eligible for RAS. The scheme helps a borrower gradually pay down his unsecured debts that are in excess of his annual income. This portion of debt is restructured into a fixed instalment plan with a 5% interest rate per annum and tenure of 8 years.
The application for RAS closes in December 2015. Ask your bank if you are eligible for RAS, as enrolment on the scheme is subject to terms and conditions.
To help borrowers avoid falling deep into debt, the Monetary Authority of Singapore has introduced a limit on how much outstanding debt you can owe on credit cards and unsecured loans across all financial institutions. The borrowing limit will be phased in over four years to give indebted borrowers time to gradually reduce their debts.
Information disclosure to help consumers make better decisions
From June 2015, if you do not pay your bills for credit cards and unsecured loans in full, you will receive a disclosure statement from your bank. This statement sets out i) the total amount and time needed to fully pay off your debts if you pay only the minimum payment each month; and ii) the amount of debt that will accumulate by the end of 6 months if you make no payments during this time. Each table will be customised to a borrower’s unique circumstances.
This information aims to help borrowers understand the costs of being in debt so that they can better manage their spending and cash flow. A sample of the additional disclosure table is appended below with the customisable portions detailed in red:
If you have outstanding balances on your credit card or unsecured loans, it is important to pay more than the minimum sum each month if you can manage it, and stop spending on your credit card or using your unsecured loans. The examples below show how your total debt will be affected by how much you pay and spend on your credit card or unsecured loans.
By the time their debt is fully paid off, Borrower A will pay almost 50% more than what Borrower B pays in total. Borrower C will never be able to pay off his debt fully if he continues spending $200 each month on the credit card. Eligible borrowers who sign up for RAS will bring down their debts even faster than borrower B. Such a borrower would have an estimated outstanding balance of $31,900 after 2 years.
If you are not able to pay the minimum payment for 60 days past when it is due, your banks will need to suspend your credit.
All of us have credit reports if we have ever had a credit card, or taken a loan from a bank. A credit report contains records of your credit facilities and your payment history; this includes late payments, defaults and bankruptcies.
The data residing in a credit bureau is contributed by its members such as banks. When you apply for a credit card or an unsecured loan with a bank, the bank will obtain a copy of your credit report from the credit bureaus as part of its credit checks. Data in the credit bureaus has recently been expanded to include your total credit limits and outstanding debt balances across all financial institutions.
This information allows banks to assess your ability to service your debt obligations. A bank may decide not to issue new credit cards or unsecured loans, or increase your credit limit, if you are accumulating too much debt or you have not made payments for any of your loans. Therefore, a poor credit record can hurt your ability to borrow money.
For more information on how to obtain a credit report, please refer to the websites of Credit Bureau (Singapore) Pte Limited (CBS) and DP Credit Bureau Pte Ltd (DPCB).
Click on these links to view a sample credit report.