Come June 2019, MAS will roll out the third and final revision for the total unsecured debt limit. How will your credit card spending and personal loans will be affected?
Come June 2019, the industry-wide borrowing limit in Singapore will undergo its third and final revision, bringing the total unsecured debt limit down to 12 times a borrower’s monthly income.
The move is part of ongoing efforts by the Monetary Authority of Singapore (MAS) to manage growing debt among Singaporeans.
What this means is if you owe more than 12 times of your monthly income across all your unsecured credit facilities for more than 3 consecutive months, you will be unable to apply for or make use of further credit.
Those with outstanding debt should take note, lest this latest round of revisions cause you to become financially stranded.
What Types of Credit Facilities Will be Affected by the Revision?
The borrowing limit of up to 12 times your monthly income applies only to unsecured credit facilities, such as credit cards and personal loans. This also includes amounts rolled over on credit cards and balances outstanding on unsecured loans that accrue interest.
Loans that are secured by collateral, such as home mortgages and car loans, are not affected by the ruling, and do not count towards your personal borrowing limit.
How Might the Revision Affect Me?
The revision reduces the amount of unsecured credit you can access, limiting you to 12 times of your monthly income. This cap applies even if you have not reached your total credit limit across all your existing facilities.
See the following table for a simple illustration:
|Total credit limit across financial institutions||Current unsecured debt||How much can you borrow from June 2019?|
|15x monthly income||12x monthly income||None, limit reached|
|15x monthly income||10x monthly income||Loan or credit equal to 2 months’ income|
Now this is where it can get tricky of those of us who have yet to clear our outstanding balances.
Let’s say you aim to get married in the second half of 2019, and are planning to take a personal loan to pay for your wedding. Expenses include a banquet, bridal package, photography, and honeymoon.
The total amount borrowed under your wedding loan is equivalent to about 8 times your monthly salary. Currently your total unsecured credit balance is about 5 times. With the wedding loan, your total unsecured credit balance would increase to 13 times your monthly salary.
Here’s what’s likely to happen, based on the prevailing rules.
|Maximum borrowing limit||Existing unsecured credit balance||Total unsecured credit balance with wedding loan||Eligible for wedding loan?|
|Before June 2019||18x monthly income||5x monthly income||13x monthly income||Yes|
|After June 2019||12x monthly income||5x monthly income||13x monthly income||No|
|From 1 Jan 2018, before June 2019||18x monthly loan||6x monthly income||14x monthly income||No|
The first two rows of the table shows clearly that you will not be able to get as large a loan as you need; you’ll be short of a couple of thousand dollars.
By the same mechanics, you may find that all your credit cards stop working after the revision, causing much unwanted embarrassment, confusion, and anxiety.
So now you’re clear on the potential ramifications of the credit revision, but what about the third row in the table?
Well, to reduce the number of people who might be caught by the revision in the manner described above, the MAS implemented earlier this year an added ruling.
Under the Credit Limit Management Measure, borrowers with outstanding unsecured balances matching or 6 times their monthly income would be prevented from increasing their credit limits, or applying for new unsecured credit facilities, should doing so increase their total credit limit to more than 12 times their monthly income. Once again, this may prevent you from borrowing the amount you need.
However, for this ruling, unsecured loans for educational or medical purposes do not count towards the limit.
So if your request to increase your credit limit for the holiday season was declined, you should be aware that you are likely to be affected by the coming round of revisions.
How Can I Avoid Being Negatively Affected by the Borrowing Limit Revision?
But all is not lost. There are some steps you could take to tamper or even avoid the negative effects of the borrowing limit revisions.
For a start, update all your banks on your current income, especially if there was an increase since 2015. This might edge you out of reach of the borrowing limit, making some more unsecured credit available to you.
Clear Your Debts to Stay Clear of the Borrowing Limit
While you might squeeze out a little more credit by updating your income details, that’s a temporary measure at best. The ideal and permanent solution is to clear your debts.
Wiping the slate clean will clear the way for your future plans, while relieving you of the burden of keeping up with high-interest fees charged on unsecured credit.
Start by getting a credit report, which will give you an idea of your borrowings across the financial institutions. Then, restructure your debts by reducing your interest fees. This means moving your debt from a high-interest instrument (such as a credit card) to a lower-interest instrument (such as personal loans or balance transfers).
Depending on how heavily leveraged you are, you may find yourself being denied for these facilities (as you’ll need to dip even further into your unsecured credit limit.) Hence, you may need to free up some credit first by paying off a credit card or loan the old fashioned way - regular payments until you clear the debt.
If you find yourself struggling with high monthly repayment amounts, consider applying for a Debt Consolidation Plan instead. Your repayment period will be long (up to 10 years), but your interest fees (and therefore, monthly payments) will be reduced, making it easier for you to cope.
Start Early Rather Than Late
No matter your level of debt, you should still make a plan to start clearing your unsecured debt. Aim to bring your outstanding credit balance to under the 12-month mark. This way, you will at least have credit to cope with minor emergencies, instead of being left with completely zero access to credit.
If you are in the market for a personal loan and have done your homework about your borrowing limit, here are 3 of the best personal loans in Singapore for you to consider.
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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.
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