Managing debt: What can you do?

The weight of debt can add emotional, relational and financial stress to our lives.

Good money habits can help you avoid falling into the debt trap. This is important as a good credit repayment history makes it easier for you to obtain credit and qualify for loans when you really need it.

Paying off your debts

Remember: Pay off the debt with the highest interest first. If you have credit card debt, other unsecured loans or instalment plans, follow these steps to pay them off as quickly as possible. Repeat until your debts are paid off:

1. Order your outstanding loans by interest rates.

2. Pay off the full amount with the highest interest rate.

3. If you have trouble paying the full amount, pay it off in parts. Save and pay till it's paid off.

4. When you have money to spare e.g. after receiving a bonus, increase your regular repayments or make lump sum payments. Check if there are penalty charges or if you need to give your FI advance notice.

5. Go back to Step 1 and start over. Keep going till you pay off all your loans.

To better manage your cash flow, adopt the following good habits:

1. Draw up a budget – List out your monthly income and family expenses, and see what expenses you can trim to repay your debts faster. Cut out indulgences like eating out if you have trouble paying your bills.

2. Review your debts– Avoid having many sources of credit. It is easier to keep track of repayments when you have fewer credit facilities.

3. Pay on time – Make your repayments on time to avoid interest and late charges. If you have difficulty making the repayments, talk to your FI.

What if you can't pay?

Speak to your FI immediately. They may be able to help you restructure your payments.

If you can't keep up with repayments:

• Your credit score will be affected. Your credit score forms part of your credit report which, alongside other considerations, is used by lenders to assess the creditworthiness of borrowers before approving a new credit facility

• Late payments may lower your chances of getting a loan in the future, or require you to pay a higher interest rate for a loan

• The bank will take increasingly severe measures if you ignore them

Work with your FI

Do not avoid calls or letters from your FI, its lawyers or debt collectors. Talk to them as soon as possible. Remain co-operative and contactable. If you are co-operative, your FI will be better able to help you restructure your payment schedule.

If you have multiple debts

Don't give up – you can improve your debt situation. Here are steps you can take:

• Review your credit report regularly to be aware of any information that is uploaded on your credit file

• Talk to your FI. See if you can convert your outstanding credit and unsecured loans into a debt repayment plan, where you can repay your debt by instalments

• Do not borrow from other sources to pay off your debts without first comparing the interest charges and fees

• Refrain from charging more to your credit cards or drawing down on your unsecured loans. Give up your unused cards and your credit lines!

• Pay the debts which incur higher interest first, but look out for penalties

Where to get help

You can do the following:

• Contact Credit Counselling Singapore for help to resolve your debt problems.

• Apply for a Debt Consolidation Plan, if you have unsecured debts exceeding 12 times your monthly income. Your debts from different banks will be consolidated with one of the participating banks at a lower interest rate.

Debt Consolidation Plan (DCP)

If you're heavily in debt, a Debt Consolidation Plan (DCP) could help you turn things around. DCP is an industry-initiated debt-refinancing programme.

How it works

With this plan:

• Your outstanding unsecured debts from different FIs are moved to one FI

• The interest rate will be lower. You're committed to making fixed monthly repayments until you repay all outstanding balances

• Except for education, medical or business loans, you can't use your existing unsecured credit facilities or get new ones anymore. Instead, you'll receive a concessionary revolving unsecured credit facility in the form of a credit card. It comes with a credit limit of 1 month's income for your daily needs

Who can apply for DCP?

You can apply for DCP if you meet these criteria:

• You're a Singaporean or Permanent Resident

• Earn a salary between $20,000 and $120,000 a year

• Have net personal assets of less than $2 million

• Have unsecured debts exceeding 12 times your monthly income

Do note that after you close the DCP account, the last 12 months' payment status history will be displayed in your credit report for three years.

Avoiding the debt trap

Here are some ways you can tweak your habits to avoid or reduce debt.

When paying your bills or loans:

• Pay off high-interest loans and credit facilities first

• Use GIRO to automatically pay your bills, so you don't forget to make payments

• Avoid credit card fees and charges by paying your bills in full before the due date

When spending money:

• Save up for big ticket items instead of buying on instalment

• Don't shop on impulse; compare prices before buying

• Use cash or a debit card to shop

• Avoid people who pressure you to spend

If your debt on all credit cards and unsecured credit facilities with FIs exceeds 12 times your monthly income for three consecutive months, you will not be able to get additional credit facilities and your existing credit line(s) will be suspended.

More information:

• Rules for borrowers who are 60 days past due

• Credit limit management measure