Nobody wants to get themselves into a debt problem, but the fact is we live in a materialistic society and it's easy to fall into debt without realising it. Even high-income earners in Singapore aren't immune to the problem.
Maybe you overspend a little every month, go for frequent holidays or tend to be too generous when it comes to buying your friends and family gifts, but you never thought that you could be one of those people with a debt problem.
Are You Spiralling Into Debt?
You might not be in debt yet – but are you falling into it? Take note of these warning signs:
- You're only paying the minimum sum required for your monthly credit card bills (read about the dangers of minimum card repayments here).
- You're struggling with payments but you're still swiping your credit cards.
- You lose track of your monthly spending and have no idea what your total debt size is.
- You consistently spend more than you earn.
If the above four points apply to you, it's time to do something about how you manage your money.
We at GET.com have put together this checklist below which you shouldn't miss if you want to get rid of debt.
1. Cut Spending
You should sit down and take note of your entire situation before you start planning a budget. Prepare a sheet where you clearly note down how much debt you have now, how much you are earning and what you spend on every month. This information will help you set up a monthly budget.
Next, look at the list of items you spend on each month. Can you cut out the unnecessary?
At first glance, every item may feel like a need to you, but ask yourself honestly, do you NEED a facial every month? Do you have to spend $300 on nights out and drinks every 2 weeks?
Recognise that you have a debt problem and you need to adjust your lifestyle to solve that. Some "outflows" that you might want to consider cutting include unnecessary shopping, dining out, gifts and holidays.
Before you spend, ask yourself if there's a cheaper option or whether you really need it. Then sleep on it to avoid buying on impulse.
Remember that making purchases on your credit cards isn't the best option now, especially if you can't pay off the entire bill before the due date.
You will be racking up unnecessary fees and interest charges that will add up. One of the best way to solve this problem is to ask your bank to close off your credit card account so that you focus on clearing the debt without adding on to it.
Doing this is an immediate way to stop you from the temptation of swiping your cards without second thoughts.
Lastly, look at the current amount of debt that you owe. Are you able to pay it off as soon as possible? If not, make plans for monthly repayments and make them your priority every month before you spend on any extras you don't need.
2. Cut The Cost Of Your Debt
If you have a number of debts and bills to pay every month, list them down and prioritise them. Necessities and those with high interest charges should be at the top of your list. Some of these priority debts include:
- Mortgage loans and rent (so that you and your family continue to have a roof over your head)
- Income tax
- Utilities bills
- Credit card bills
If you have a variety of smaller debts, you might consider debt consolidation as well. Debt consolidation brings together these debts into a single payment and should ideally come with a lower interest rate compared to the average of each interest rate attached to those individual smaller debts.
For example, David has accumulated debts on three different credit cards. Credit cards typically charge an interest rate of 24-26% per annum so it will be to his advantage to seek out a debt consolidation plan where he can pay off these 3 credit card debts with a single loan that charges a 4% annual interest rate.
For larger loans or debt such as home loans, refinancing can be an option. In Singapore, home owners often seek out refinancing after their mortgage loan's lock-in period to get better deals.
For instance, in the current rising interest rate environment, it might be worthwhile to take up a fixed rate loan or a fixed deposit home rate (FHR) loan instead of sticking to a variable rate loan.
However, do remember that there could be fees and charges when you choose to refinance or re-price your mortgage, so do take note of the fine print.
Another option you have to reduce the cost of debt is to consider liquidating certain assets. We all know that having a car in Singapore comes at a huge cost; so if you are struggling to finance your car loans, selling that liability could greatly reduce your debt burden.
Similarly, you may consider a downgrade to the current apartment you are living in to reduce the amount of the home loan you need to pay.
A useful way to reduce your debt is to increase income using your current resources. For example, you might have bought a condominium 3 years ago and started to have problems financing the mortgage this year after losing your job.
How about renting out the spare room to make some passive income? If you can stay with your parents for a while, you can even consider renting out the entire condominium so that it can help you to service your monthly repayments.
The same goes for your car. You can now make money with your car offering chauffeur/taxi services. Companies such as Grab allow you as a driver to make money just by using your car - and you can drive anytime you want!
This means that you can make extra income anytime you want without having to quit your full-time job.
3. Last Stop Measures
If you'd already tried cutting your spending and reducing your debt burden with the above measures and still feel like you are drowning in debt, it could be time to seek help.
Credit Counselling Singapore (CCS) offers help to those that are willing to seek assistance and offers a 3-step help process for those needing emergency assistance for their debt problems.
Step 1: Mandatory attendance to info talk on debt management. The free talk is conducted on a weekly basis and presents the various options you have in handling a debt problem.
Step 2: If you prefer to seek a personal conselling appointment after the talk, submit an appointment and all relevant documents about your assets, liabilities, income and other resources so that the CCS and help you explore a plausible solution. The credit counselling appointment usually lasts about 2 hours and depending on the individual, additional sessions might be needed.
Step 3:There is also a Repayment Assistance Scheme (RAS) administered by Credit Counselling Singapore (CCS) that helps borrowers pay down the amount of unsecured debt they have.
The RAS offers an interest rate of 5% per annum over a fixed period of 8 years. However, this rate only applies to amounts that are in excess of 12 times the borrower's monthly income.
Eric earns $4,000 a month and currently has a total credit card debt amount of $70,000. He will need to service the debt amount up to 12 times his monthly salary under the existing terms of his debt.
This means he will need to service the first $48,000 under the terms of the credit card issuer. But for the remaining $22,000, he will be able to apply to the RAS and service it with a 5% annual interest rate.
The RAS has its own set of eligibility rules as well; you need to fulfil the following requirements:
- Singapore citizen or Singapore permanent resident
- Annual income of less than $120,000
- Net personal assets that are $2 million or less
- Have total interest-bearing unsecured debt with financial institutions in Singapore that exceeds 12 times the monthly gross income before June 2015
- Have good repayment records with financial institutions, such as currently making monthly repayments under your unsecured credit facilities
Note that the RAS will only be available till December 31, 2015.
Find out more about how the Repayment Assistance Scheme can help you get rid of debt here.
If you prefer to handle your debt problem on your own and are confident enough to solve it without additional help, you could seek out your creditors to work together towards a solution both sides are comfortable with.
It might be our reflex to run away from our creditors but remember that they only want to be able to get their money back from you. The first step you should take is to speak to your creditors as soon as possible.
Tell your creditors that you are having difficulty meeting your bills and explain your situation. Some suggestions can include:
- Freezing any outstanding charges
- Offering you a payment holiday
- Negotiating a repayment schedule where you can clear your debts in instalments
- Extending the payment deadline
These measures are of course up to the goodwill of your creditors, as they are not obliged to abide by them. Prepare yourself mentally that they could reject your suggestions and continue to demand payment or levy the monthly interest charges on your debt.
You can also check out the three best ways to get rid of debt here.