If you’re struggling with debt, 2016 is the year for you to get your financial health back on track.
The new year is a fresh start, and it’s a good time to put an end to all that debt. With a little bit of discipline and effort, it’s amazing what you can achieve in just a few short months.
If your goal is to become debt-free before 2016 ends, give these strategies a try.
1. Aim to Pay 30% Above the Minimum Required Repayment
It is almost impossible to finish repaying a debt if you only make the minimum payment. The minimum amount (often S$50 or 3 to 5% of the sum owed, whichever is higher) does little to amortise your loan. This means the repayment offsets the interest first, and what little remains is used to pay the original loan.
If you owe S$5,000 on a credit card, and you make only minimum sum repayments, it will take approximately six and a half years to complete repayment. It would also mean that, at the end of the loan, you would have repaid around S$8,000 for your S$5,000 loan.
For this reason, always pay more than the minimum. Aim to exceed the amount by 30% (e.g. if you only need to pay S$50, pay back S$65).
Remember that the faster you repay the loan, the less you waste on repaying interest.
2. Get a Low-Interest Debt to Pay Off a High-Interest Debt
An example of a high interest debt would be a credit card debt at 24% per annum. One way to deal with this is to use a personal loan (around 6% per annum) to pay it off. For example:
Say you owe S$7,000 on your credit card. This loan snowballs at 24% per annum. Rather than cope with this spectacular interest rate, you apply for a personal loan for S$7,000, which has only 6% interest.
You then pay the S$7,000 credit card loan, and make your repayments to the cheaper personal loan instead. Just remember not to use the credit card anymore, until you have also finished repaying the personal loan.
Currently, Citi Ready Credit Paylite has one of the lowest personal loan interest rates in Singapore at 4.55% p.a. (EIR 8.5% p.a.) for new customers.
3. Make a Balance Transfer
Credit cards sometimes have balance transfer options. This is when you can shift the debt from one credit card onto another. The new credit card will usually have a 0% interest rate for a given length of time (often six months).
Note that this is not “free” and there could be an administration charge of a few hundred dollars when you transfer. Do not repeatedly defer your debt by going from one balance transfer to another. This will build up the amount that you owe each time, due to the accumulating balance transfer fees. It will also damage your credit score.
A balance transfer should be done if you are confident of repaying the debt within the interest-free period. Otherwise see the personal loan option in point 2.
4. Close or Cancel Your Credit Accounts After Paying Them Off
Whenever you finish paying off a loan or a credit card, close the account. Do not allow yourself access to more credit. Maintain this until you have cleared out everything you owe. From that point on you can use credit again, but hopefully you will be more careful from this point.
This is important because some tools, such as credit transfers, can aggravate your debt if you get into temptation. If you continue to use a credit card that you just made a credit transfer from, you will simply stack additional debt on top of what you already have.
5. Contact Credit Counselling for Help
Credit Counselling Singapore (CCS) provides help in two ways. The first is through a debt management programme, in which an expert can assess your specific situation and provide strategies for it. The second is by helping to mediate between you and your creditors.
It is possible that some banks will renegotiate the terms of your loan, as they would rather have some money back than none at all. While the banks seldom negotiate with you as an individual, they may do so through a credit counsellor.
Note that, if you absolutely cannot repay your debt, you must contact a credit counsellor as soon as possible. The longer you wait, the more the debt will snowball.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.