Credit cards debts can be tricky to handle. This step-by-step method will help Singaporeans clear debt quickly and reliably.
With latest figures on average debt per Singaporean standing at almost S$53,000, chances are you’re dealing with some amount of debt.
The problem with debt is the interest. Compounding interest makes it such that the longer you wait to pay off your debt, the more you’ll end up paying.
Even more insidious, interest payments can rob you of future financial stability. Every dollar you pay as interest becomes one less dollar in your savings account or investment portfolio. This means that the more you delay clearing your debt, the worse off you’ll be in the future.
Because of this, clearing interest-bearing debt needs to be a high priority. If you have credit card balances that will take you more than 6 months to clear, follow this step-by-step guide to reliably clear your debts as quickly as possible.
Step 1. Restrict Access to Your Credit Facilities
Apart from mortgages, the most common source of debt for Singaporeans are credit cards. This is both good and bad news for those of us dealing with debt.
When used responsibly, credit cards are convenient and rewarding. However, because they are so easy to use, we can end up relying on them well beyond the point when it’s safe to do so.
The good news is, it’s entirely possible to choose to stop using credit cards temporarily, thereby stopping us from taking on more debt.
Because cards nowadays come with electronic chips installed, we don’t recommend the old standard of freezing your cards in a cup of water to prevent further use.
Instead, put all your credit cards into a sturdy lockbox, lock it up and keep it somewhere secure. Hand the lockbox key over to someone you trust, and only let them give you the key back when you are in the clear.
Don’t forget to login to your shopping websites and apps and remove your saved credit card information. This is especially important if you use services like Uber or Grab that essentially remove the payment process from the service.
Step 2. Rank Your Debts According to Interest Rate
The next thing you need to do is to check all your credit card bills for 3 pieces of information, which you will compile in a simple spreadsheet.
For each source of debt, list down: the amount owing, the interest rate, and the minimum payment required per month. Then, arrange your list of debts according to interest rates.
If you have multiple debts with similar interest rates, prioritise the one with the lower amount owing.
Do note that if you drew a cash advance, the interest on that amount will be higher than your base credit card rate. Hence, if one of your cards has a substantial balance that is mostly from cash advances, put that on the top of your list.
At this point, you should also go ahead and tally up how much you owe in total, across all your debts. Try not to be too shocked by the final amount; the point is to know how financially extended you are.
If you find out that you owe a massive amount of debt – i.e., 12 months or more than your monthly salary, you should look at using a Debt Consolidation Plan to manage your debt instead.
Step 3. Determine How Much You Can Pay Each Month
Next, you want to find out how much you can reliably pay towards your debts on a monthly basis.
Do up a simple financial statement where you compare your income against your expenses. Be as detailed as possible when doing this, because the point is to have a clear look at where your money is going.
Total up all your bills, including installment payments, if any. For credit cards, total up the minimum payment sum for each (from Step 2 above) and add it to your final expenses tally.
Go through your list of expenses and see where you can make reductions. Once you’ve trimmed down your expenses as much as possible, compare it against your income to see how much surplus you have each month.
From this surplus, you should set aside 30% to 50% as savings. The remaining amount (let’s call it the Monthly Debt Payment) is what you will use to pay off debt.
Illustration: Income: S$3,500 Expenses (including credit card minimum monthly payments): S$2,900 Surplus: S$600 Savings (50% of Surplus): S$300 Monthly Debt Payment: S$300
Should you find that your surplus is not large enough for you to meaningfully save and pay off your debts at the same time – or worse, is negative – it’s time to increase your income.
If you’re not confident of balancing your sums on your own, a Debt Consolidation Plan (DCP) can help you avoid this step. As one of the 14 authorised providers of DCP, HSBC will take over all your existing liabilities, and work out a repayment plan for you that entails one fixed monthly repayment throughout the DCP tenor. This saves you from having to track multiple payments on your own.
Step 4. Lower Your Interest Rates
Once you have a clear picture of your debts the next step is to reduce the interest rate. The way to do this is by using a Balance Transfer. Alternatively, a DCP can also help you to lower interest rates.
Firstly, let’s talk about a Balance Transfer. This lets you transfer your existing credit card debt onto another credit facility, usually with a fixed 0% interest repayment period. This gives you the opportunity to repay your outstanding balance at 0% interest, effectively saving you money on interest payments.
However, do note that a Balance Transfer’s interest rate shoots back up to the prevailing rate (often equivalent to your credit card’s base rate) once the interest-free period is over. You’ll also have to pay an admin fee upfront. Also, you can only take out a Balance Transfer up to a proportion of your existing credit limits, which mean you may not qualify if your credit limits are exhausted.
If, instead you qualify for a DCP, you will be getting a fixed interest rate for the duration of your DCP tenor. For example, HSBC’s DCP offers flat interest rates ranging from 4.7% p.a. to 5.9% p.a., depending on the duration of your plan. Whichever it is, you only have to manage one interest rate throughout.
Step 5. Start Paying Down Debt
Take a look at your credit card balances and highlight the one with the highest interest rate. That’s your Target Debt, and that’s the one you’ll go after first.
Each month, pay the minimum monthly payment on that card, plus the Monthly Debt Payment towards your Target Debt. For the rest of the credit cards, pay only the minimum sum for now. You’ll get to them eventually.
It is important that you cover the minimum monthly payments for all your outstanding cards, otherwise you will rack up late fees that can cost up to S$80 per month.
Keep this payment schedule until your Target Debt is cleared.
For a DCP, there is only 1 Target Debt – the fixed monthly repayment you’ll use to pay off your debt. Do remember to make the payment on time, or you may incur late fees.
Step 6. Keep Going
Once you’ve cleared your first Target Debt, your Monthly Debt Payment will increase. Why? Because you no longer have to pay the minimum monthly payment on the card you just paid off.
So, you’ll want to add this extra amount to your Monthly Debt Payment, and use it to go after the debt with the next highest interest rate.
Once you clear this second source of debt, increase your Monthly Debt Payment again, and go after the next debt on your list.
And that is the key to this method: because your Monthly Debt Payment increases with every card you clear, you’ll make faster and faster progress as you keep going.
Illustration: Monthly Debt Payment: S$300 Target Debt (Credit Card 1) minimum monthly payment: S$150 After clearing Credit Card 1... New Monthly Debt Payment: S$300 + S$150 = S$450 Monthly Debt Payment towards New Target Debt (Credit Card 2): S$450 per month
Step 7. Celebrate Your Progress
It can seem daunting as you embark on clearing your debt, especially when you see how much you owe at the beginning. That’s why this method breaks down your debt into manageable chunks which you will clear one at a time.
One important key to success is to celebrate your progress. Doing so will give you an important psychological boost that will reaffirm your ability to take control of your debts.
Try this: once you clear your first credit card, use the minimum monthly payment from that card to buy yourself a reward. On the next month, add that minimum monthly payment to your Monthly Debt Payment, and keep going.
Repeat until you hit your next milestone (clearing your next card), allow yourself another reward, then keep going until you reach your final goal – S$0 balance in credit card bills.
Step-by-Step is the Name of the Game
If careless spending was how you racked up all that credit card debt in the first place, then it’s fitting that a careful and steady repayment plan is how you will pay your debts down.
Managing credit card debt is a matter of gaining clarity about your position, forming a game plan, and then executing that plan, step by step. You may be feeling helpless about your large debts, but making a plan to deal with them is incredibly empowering.
As we’ve hopefully shown you through this method, steady and methodical doesn’t have to mean slow and painful. If you tackle the debts with the highest interest-highest balance first, your progress grows with every card you clear.
Because you are paying with funds already allocated to your credit card bills, you won’t have to worry about coming up with additional money. This not only makes this method a reliable way to clear off debt, it also allows you to get on with your other financial goals, such as building an emergency fund, while doing so.
Alternatively, if you prefer to tackle your debts with the help of the professionals, (and provided you owe at least 12 times monthly salary), you can opt for HSBC’s Debt Consolidation Plan to work out a suitable repayment schedule at lowered interest rates on your behalf.
So don’t feel disheartened. Whether you choose to go at it on your own, or recruit some expert help, it is entirely possible to clear your credit card debt.
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By Alevin Chan
A Certified Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimize happiness and enjoyment in his life.