Debt management requires you to be active, consistent and punctual in repayment

Image credit: Alan Cleaver l Flickr

Debt management is important even for small amounts of overdue amounts

Small amounts of overdue debt can spiral into something huge and seemingly uncontrollable. Having overdue debts can be a frightening prospect as it can take on a high compound interest rate. With patience, responsibility and deliberate actions taken, you can trim your outstanding overdue balances gradually and better manage your debt.

To better manage your debts, you have to be active, consistent and punctual when making payments. Any failure to make full payments will incur a minimum fee and interest rate charges, therefore it is best to pay on time and in full. If you are having difficulty doing so, you should look to limit your expenditure and maximise the repayments you are able to make to credit lenders. When faced with repayment to multiple credit facilities, it would be wise to prioritise those with higher interest rates first.

If you want to reduce your debt but are unsure of where to start, do not worry! You can purchase a credit report from Credit Bureau Singapore (CBS) to view a summary of your credit history and find all the necessary data that can help you make a comprehensive plan to reduce your outstanding balances. It can help you start building good habits of managing your personal finances.

Debt Management Programme

If you are still struggling with debt management despite your best efforts, you may consider signing up for the Debt Management Programme (DMP), an initiative by Credit Counselling Singapore (CCS). CCS specialises in assisting people with unsecured, legal, and consumer debt problems.

Debt Management Programme is a voluntary monthly debt instalment plan that allows the consumers to repay their unsecured debt (e.g. credit cards and overdraft), including the principal amount and interest charges, to their creditors over a reasonable period of time. It is, however, still the creditors’ prerogative in offering an instalment plan and in specifying the terms of the repayment.

Debt Consolidation Plan

Introduced in January 2017, the Debt Consolidation Plan (DCP) is a little known option of reducing credit debt. DCP is a debt refinancing programme where customers consolidate their unsecured credit facilities across various financial institutions under 1 participating financial institution.

You may wish to consider DCP if you are juggling multiple outstanding repayments across various financial institutions. Under DCP, you will have 1) a greater ease of payment, 2) lower interest rates and 3) greater control of finances under a disciplined fixed monthly repayment scheme.

However, do note that some categories of unsecured loans are not included from DCP, such as joint accounts, renovation loans, education loans, medical loans, and/or credit facilities granted for businesses or business purposes.

To be eligible for DCP, you must meet the following requirements:

  • You are a Singapore Citizen or Singapore Permanent Resident; and
  • Earn between S$20,000 and below S$120,000 per annum with Net Personal Assets of less than $2 million; and
  • Have total interest bearing balances^ in respect of unsecured credit facilities with financial institutions in Singapore exceeding 12 times the monthly income

 ^ Interest bearing balances include amounts rolled over on credit card and balances outstanding on unsecured loans that accrue interest

You may approach any of the 14 participating Financial Institutions (FI) for a DCP. It will be up to any one of the FIs to make an offer. The first step to reducing debts or building credit scores is to know what areas can be improved. You can start by obtaining your credit report from Credit Bureau Singapore. A little investment can go a long way.

Debt management could also entail you taking a loan. Taking a loan for debt riddance is a huge responsibility, therefore you have to think through it thoroughly. Borrow only when you need to and have carefully considered how it may affect you. You need to consider some factors before taking a loan, this includes your family.

Those that trying debt riddance may consider taking a cash advance on a credit card – but remember that this is a very expensive proposition.

There is usually a fee charged for advances along with very high interest rates that begin ticking away from the moment you initiate the advance. Cash advances are very costly, high-risk item. The cost of a cash advance from a credit card can be 500 percent or more.

debt management
Image credit: Alan Cleaver l Flickr

In your effort in debt riddance, don’t dig one hole to fill in another.

Before taking a loan, you have to consider other expenses such as car monthly installment, transport expenses, food, child’s education and other expenses. The best way is to write down all your expenses on a piece of paper and do the necessary calculation. After which, apply for the loan when you are sure that you have the ability to repay the loan.

If you have financial discipline and are willing to put your house at risk, home equity loan could be a fix for debt riddance. There are pluses, such as a lower interest rate and the deductibility of the interest payments. And a home equity loan can be relatively fast compared to a full-blown mortgage loan.

A home equity loan is also called cash-out refinancing, or a second mortgage. A home equity lets you borrow money, while using your house as collateral. Home equity loan is another option available to homeowners who may have a tight cash situation but have have a valuable house at their disposal, which they may sell and downgrade. But a home equity loan lets you get money out of your house, without having to lose it.

There are plenty of advantages: when your house is the collateral, the bank feels a lot more secure; they know you can’t exactly pack up your house and run away with it. Because there’s something they can foreclose on, banks consider home equity loans to be low-risk, secured loans. That means they charge a super-low interest rate, seldom above 1.3 per cent per annum. For reference, that’s less than a third of your CPF Ordinary Account rate (up to 3.5 per cent per annum), and about 1/6th of a personal loan rate (about six per cent per annum).

That super-low interest rate means home equity loans are quite cheap, and can provide a much bigger loan than you’d get through, say, a personal installment loan. Most other, unsecured loans can only lend you up to four times your monthly salary.

Written by Ravi Chandran

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