Singapore has one of highest levels of household debt in Asia – rising to about 76% of gross domestic product (GDP). Then again, if you look at the debt commitments of the average Singaporean – mortgage, credit card debt, car loan, etc. – it’s really no surprise that the level of household debt is so high!
The Monetary Authority of Singapore (MAS) has stepped in on a few occasions to prevent Singaporeans from becoming over-leveraged by introducing financing restrictions on car loans and the Total Debt Servicing Ratio (TDSR) for property.
Now, the MAS has once again stepped in to prevent dangerously over-leveraged Singaporeans from falling further into debt by implementing borrowing limits on unsecured credit.
Read on and find out how the recent implementation will affect you.
Unsecured Credit Limitations for the Most Over-leveraged Borrowers
The MAS is very cautious about the steadily rising household debt level and the expected rise in interest rates by the United States Federal Reserve, which will impact over-leveraged Singaporeans by leading to higher mortgage repayments.
The MAS wants to reduce the impact of growing household debt by placing a limit on unsecured credit facilities* for Singapore’s most over-leveraged borrowers, which currently make up only 2% of unsecured credit borrowers in Singapore.
As of 1 June 2015, if your outstanding total debt is 24X of your monthly salary for 3 months – you’ll no longer be able to access unsecured credit facilities from financial institutions (FIs) such as:
- Opening new credit card accounts
- Make new purchases with your credit card(s)
- Increasing your credit limit on existing credit card accounts
- Make payments on recurring charges such as utility bills
- Apply for unsecured loans
- Make withdrawals from unsecured credit lines
MAS will also tighten the borrowing limit even further over the next four years to prevent more Singaporeans from becoming over-leveraged – here’s what the limit will look like by 2019:
- 1 June 2015: If your debt is 24X of your monthly income for 3 months
- 1 June 2017: If Your debt is 18X of your monthly income for 3 months
- 1 June 2019: If your debt is 12X of your monthly Income for 3 months
*Note: The limit only applies to interest-bearing unsecured debt and does not include your mortgage or auto loan.
What You Can Do to Manage Your Unsecured Debt Burden?
If you are in a situation where your unsecured debt is more than 12X of your monthly salary, there is a repayment scheme available that will make it easier for you to tackle your debt problem.
Credit Counselling Singapore (CCS) and the Association of Banks in Singapore (ABS) have introduced the Repayment Assistance Scheme (RAS).
RAS is a debt repayment plan that enables Singaporeans with debt exceeding 12X of their monthly income to pay off their “excess” debt at the low interest rate of 5% p.a., which beats paying the 24% interest rate that usually comes with credit cards.
Plus, if you’re carrying a large amount of unsecured debt, the RAS allows you to pay off your debt over a period up to 8 years – but it only applies the debt that exceeds 12X of your monthly salary.
Here are a few cases illustrating how RAS scheme can help you tackle your debt:
To work out the amounts that are eligible for the RAS interest rate is just simply taking the total amount of unsecured debt and deduct it by the 12X of your monthly income.
Hence, from the table;
- Mr. Kang, as a product manager, with a monthly income of S$4,500, has a debt amount of S$21,000 that is eligible for the RAS interest rate
- Ms. Poh, as a legal secretary, with a monthly income of S$2,500, has a debt amount of S$60,000 that is eligible for the RAS interest rate
- Mr. Yeo, as a business development manager, with a monthly income of S$8,000, has a debt amount of S$6,000 that is eligible for the RAS interest rate
What if Your Unsecured Debt is Below 12X of Your Monthly Salary?
If that’s the case, you won’t be able to take advantage of the RAS. Instead, you’ll need to tackle your debt the old fashioned way – by changing your spending habits, resisting the temptation to make big money purchases with your credit cards, and considering a personal loan or balance transfer to reduce your debt burden.
For more financial tips and tricks to optimise your financial lifestyle, visit imoney.sg and learn all the best moves to make with your money.
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