How Can A Personal Loan Help You Manage Credit Card Debt?
Do you find yourself whipping out your credit card on a daily basis?
You’re not alone – credit cards have become the most preferred way to pay for purchases among Singaporeans. And who can blame us? Credit cards are convenient, they offer an array of perks and rewards, as well as allow us to save on our spending.
While credit cards can be a boon for discerning spenders, using them irresponsibly can lead to a dark downside: credit card debt. Using a credit card to pay for purchases you cannot repay in cash can lead to mounting debt.
What happens when you incur too much debt?
According to the Monetary Authority of Singapore (MAS), here’s how much outstanding debt you can owe on credit cards and unsecured loans across all financial institutions:
- From June 1, 2017 – not more than 18 times your monthly income
- From June 1, 2019 – not more than 12 times your monthly income
If you exceed these limits, you will be unable to charge new purchases to your credit card. This even includes utility bills, issuing cheques or drawing cash. You will also be unable to apply for new credit cards or unsecured loans.
Even if you keep within these limits, using too much of your available credit could hurt your credit score. Your credit score will also be affected if you are unable to meet the minimum credit card debt repayments.
Why is it so hard to climb out of credit card debt?
Getting out of debt can feel like an uphill battle, as credit cards generally charge high interest rates of 24% to 27%. Not only do you have to repay the principal amount, you have to pay a hefty interest charge on top of that.
Your credit card debt is also subject to compounding interest rates, which means that you’ll even have to pay interest on your interest charges.
This can quickly snowball into a large amount of debt. For example, let’s imagine you have a credit card that charges a 25% interest rate. If you just pay the minimum monthly sum (say, 3% of the unpaid balance, or S$150) on a credit card debt of S$5,000, here are the interest charges you’ll incur:
|Outstanding credit card debt of S$5,000|
|Interest rate||Monthly repayment||Time to pay off||Interest charges|
In the example above, a credit card debt of S$5,000 could incur S$3,625 in interest charges and take almost 5 years to pay off!
How can a personal loan help?
While there are a few different types of personal loans in Singapore, the most common is the fixed term loan, which has a fixed repayment schedule and interest rate.
Although it may seem counterintuitive to solve your debt problem by taking on more debt, a personal loan can be an effective way to settle your credit card debts in the long run.
Here’s why you should consider taking out a personal loan to repay your credit card debt:
1. Lower rate of interest
Personal loans come with much lower interest rates than credit cards. Not only will you save money by paying less interest charges, you could also pay off your debt faster. Here’s how much you may save if you pay off your credit card debt with a personal loan under Credit Culture:
|Credit Culture personal loan||Credit card|
|Time to pay off debt||24 months||27 months|
|Total interest payable||S$960||S$1,535|
|Total interest savings||S$575||-|
In the example above, paying off your credit card debt with a personal loan could save you almost S$600 in interest payments! Having to pay less interest also means that you can clear off your debt faster with a personal loan, even if you don’t increase your monthly repayment amount.
On top of that, a personal loan has fixed interest rates. In the event of late repayments, you would not incur compounded interest.
2. Debt consolidation
Do you have debt on multiple credit cards? The end of every month can become a juggling act between different bill payments and interest rates.
A personal loan can help you consolidate your debts, which means combining all your credit card debts into a single loan under a lower interest rate. Now, you just have one loan payment to deal with.
3. Personal loans are unsecured loans
When you take out a personal loan, you don’t have to pledge any security or collateral, so creditors do not have the right to take your physical assets (such as your car or home) if you stop making repayments. Word of warning, though – you should still make your monthly repayments, as payment defaults will negatively affect your credit score.
Unsecured loans also require less paperwork compared to secured loans. If you need an immediate influx of cash to repay your credit card debt, taking out a personal loan will be relatively quick and convenient.
4. Flexible loan tenures
With a personal loan, you can choose your own loan tenure. This allows you to set a monthly repayment amount that fits your current financial position.
5. Impact on credit score
If you don’t make the minimum monthly repayments on your credit card, you may default on your card. Your credit card issuer will close your account and report the default to the Credit Bureau Singapore (CBS), which will lower your credit score rating. A bad credit score means lower chances of successfully applying for another loan or credit card in the future.
However, with a personal loan, a missed repayment doesn’t automatically mean disaster. Generally, lenders won’t report a missed repayment until 30 days after it is due. This means that a missed repayment typically won’t hurt your credit score, as long as you pay it within 30 days. Of course, you should still make your repayments on time – it’s best not to take risks when it comes to your finances.
Finding the right personal loan
Not all personal loans are equal. Some personal loans may have high interest rates or hidden fees that could slow you down in your journey to being debt-free.
If you’re looking for a personal loan that could effectively help you deal with your credit card debt, consider Credit Culture.
Credit Culture offers personal loans of up to S$50,000, with interest rates as low as 0.8% monthly. You can choose between loan tenures of 12, 24 or 36 months, giving you the flexibility to choose a monthly repayment amount that fits your finances. There are also no hidden fees – you won’t be charged with late interest or early repayment fees.
Of course, a personal loan isn’t a magic solution that can cure your debt woes. You will still need to be disciplined in making regular repayments to clear off your debt. A review of the spending habits that got you into debt in the first place may also be required. However, if you’re willing to put in the work, a personal loan could be a powerful tool for helping you pay off your credit card debt.