If You Are Strapped With A Huge Debt, Here’s What You Need To Do

If You Are Strapped With A Huge Debt, Here’s What You Need To Do

In partnership with Citi Singapore

 

 

With living cost going one way (read: up!), extra debt can run up easily without us noticing.

Even though Singapore tops the gross financial assets (bank deposits, securities, insurance and pension funds) per capita in Asean, the country also has the highest debt per capita in the region, with loans amounting to an average S$53,203 per inhabitant.

The problem? Racking up a large credit card balance, where many can’t pay off the balance and are greeted with high interest charges. Which in turn roll into much larger debt. It’s easy to get caught in a painful downward spiral with monthly payments that you just can’t afford.

Trapped in the “revolving credit” door

Here’s why you have to pay attention if you went on a recent swipe-a-thon: credit card debt is revolving debt.

It means if you are unable to pay your outstanding balance on your card by the stipulated due date, the lender will have to charge you for the privilege of borrowing their money.

So, paying off the minimum monthly payments and appropriate fees are just not enough. Here’s how much interest you accrue, if you choose this route:

Outstanding Balance:S$30,000
Minimum Payment (5%):S$1,500 for first payment
Time to pay off the balance (year/month):11 Year(s) 9 Month(s)
Total Interest Charges:S$21,021

Revolving debt is a useful tool when used with discipline but because it is open-ended – as in you have a continual source of credit – you run the risk of paying higher interest charges.

It is also important to know that revolving credit is a powerful force in determining your credit score. In fact, it has the potential to big damage if you are not careful.

The biggest variable here is your credit utilisation ratio, or the percentage of how much you owe on your card compared with your available credit. Most credit scoring models penalise you for using more than 30% of your available credit.

So, not only you have to be timely with your credit card payments, you need to keep a close watch on how much credit you are using. Slipping up could have serious consequences.

Time to consolidate and get out

One way to get a handle on revolving debt is to consolidate the debt with a lower interest credit facility, such as a personal loan.

While the thought of borrowing from a bank to pay off another bank may sound ridiculous, it is actually a workable debt consolidation model, as you can take advantage of the difference in interest rates, plus a personal loan is not a revolving credit so it’s better for managing your debt.

Basically, a debt consolidation facility allows you to merge all your multiple debts with high interests into one larger loan that offers a comparatively lower rate. So, using a personal loan to consolidate them could potentially reduce the overall interest you pay.

But there are a few factors you need to look at. Firstly, the personal loan must offer lower interest rate than your debts, and it should come with low to no processing fees. The lower the cost of borrowing is, the better off you are.

A good example of a personal loan that checks all the above is the Citi Debt Consolidation Plan. It has zero processing fee, offers rates between 5.67% – 5.95% per annum, and loan tenure of up to seven years. Plus get complimentary protection insurance coverage of up to S$160,000.

Let’s say you are straddled with S$30,000 in credit card debt. Here’s how Debt Consolidation Plan can make life easier for you:

 Revolving (credit card)Non-revolving (personal loan)
Amount borrowedS$30,000S$30,000
Interest rate25%5.67%
Monthly repaymentS$1,500S$768.10
Years to pay off11 years 9 months4 years
Interest paidS$21,021S$6,899

So under a debt consolidation model, you not only pay off that credit card debt quicker, you also save about S$14,112 in interest charges. Not only that, you will have also have more disposable income every month from the lower monthly repayment.

Once you’ve consolidated your debt, you need to stick with the payment plan and make sure to make all of the payments on time. Failing to service your loan could still land you in financial hot water.

Otherwise, you risk damage to your credit and may face additional penalties, such as added interest if you fail to keep up with payments.

The flipside, however, is that your credit card debt is rolled into one monthly fixed payment. This means making it easier to manage debt in your budget because you only have to worry about a set amount every month.

Also, the interest rate applied to your debts is now much lower, allowing you to pay off debt faster and avoid credit damage. In fact, paying off debt within a few years or less is now a reality, as opposed to the decades it would take on a minimum payment schedule.

Don’t allow your debts to pull you down. Take action with the Citi Debt Consolidation Plan now!

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