Tuesday, October 30, 2007
Caught in a Debt-Trap
Are you tired of making never ending debt payments and having no money left over every month?
Do you feel overwhelmed by the amount of debt you owed?
Are you at or near the limit on your credit facilities?
Are you borrowing from one credit facility to pay for another?
Do you skip payments on some bills in order to make others?
If you have answered ‘YES’ to most of the above questions, you are already waist-deep in trouble. For those who are not yet in it, do watch out for the warning signs and take steps to rectify the situation before it’s too late.With the growing number of credit facilities made available, it is no wonder that more and more people are getting themselves into the debt-trap, especially for those who are unable to manage their budget and cash-flow matters. According to MAS statistics, the credit card rollover balance has increased from S$1,712mil in year 2000 to S$2,759.8mil in year 2006.
The temptations are everywhere – one bank’s sales pitch for its overdraft facility goes like this ‘you can now have more cash to spend on yourself and your loved ones this coming Christmas (other festivals) and to treat yourself to a well-deserved holiday’. Helpful salespersons at major electrical store would never fail to point out the interest-free installment facilities that would allow consumers to purchase the items of their dreams. And not forgetting the brochures and posters at your friendly neighbourhood post offices that boast of accessible, fast and easy to repay loans up to four times of one’s monthly income.Here are some effective ways to steer clear of the debt-trap:
1. Take control of your financial situation by working out a budget. Assess how much money you earn and how much money you spend. Start by listing your income from all sources. Next, list your ‘fixed’ expenses like mortgage payment or rent, car loan payment, insurance premiums etc. Finally, list the expenses that vary – such as entertainment, recreation, clothing etc. By writing down all your expenses, you will be better able to track your spending patterns, identify necessary expenses and prioritize the rest.
2. Calculate your debt income ratio. This ratio reflects the percentage of your monthly take-home pay that goes to paying debts. A healthy debt service level is usually not more than 40% of your gross monthly income but this is also subject to individual’s financial situation (i.e. stability of income, changes in cash needs, extraordinary expenses etc.)
3. Use your credit card sensibly. Set a budget for your credit card spending and keep track of your expenditures. Do not charge more than what you can afford and to settle your outstanding balance in full every month. Rolling over of your credit card balance will incur interest charges amounting to approximately 24% per annum.
If you are already in debt, here are some possible ways to avoid sinking deeper:
1. Cut up your credit cards. The best way to reduce your credit card debt is to stop using your credit cards. If you have to keep one for emergencies, pick the one with the lowest interest rate. Constantly remind yourself that the emergency card is for true emergencies only and make a commitment that you will not use it unless absolutely critical. Or instead of a credit card, use a debit card.
2. If you have more than one credit card debt, you may want to consider transferring the debt from a card with a higher interest rate to one with a lower interest rate. This will lower the amount of money you are spending towards the interest and hence greater amount of money being channeled towards repayment of the principle.
3. Make extra payments, not just the minimum payments, on your credit cards. Even by paying just an additional $20 extra a month on a credit card can significantly cut your repayment term and interest charges.
4. List down all your credit card debts and pay off the one with the highest interest payment first. Another method is to pay as much above the minimum payment as you can afford on the card with the lowest balance. Continue until the debt is paid in full and then proceed to the next card. Systematically paying off your credit cards one by one will reduce your debts dramatically. The fastest way to eliminate credit card debts is to put every penny you can towards paying off your credit cards.
5. Debt consolidation might help to ease the management of debt payments and in most cases, at a lower rate of interest. There are many Debt Management companies that provide such a service. Under such Debt Management programmes, the consultants will contact your creditors and negotiate with them to have your monthly payments lowered and your interest rates reduced. You can then make monthly payments to the Debt Management companies to have them distribute the funds to your creditors on your behalf so that you no longer have to worry about making payments on the different due dates.
6. Filing for bankruptcy can be a last resort. However, do note that a bankruptcy will remain on your credit report until you are officially discharged, making it difficult to obtain credit, purchase insurance, buy property or even find job in the financial industry.
7. Seeking assistance from Credit Counseling Singapore (CCS) http://www.ccs.org.sg
Do you feel overwhelmed by the amount of debt you owed?
Are you at or near the limit on your credit facilities?
Are you borrowing from one credit facility to pay for another?
Do you skip payments on some bills in order to make others?
If you have answered ‘YES’ to most of the above questions, you are already waist-deep in trouble. For those who are not yet in it, do watch out for the warning signs and take steps to rectify the situation before it’s too late.With the growing number of credit facilities made available, it is no wonder that more and more people are getting themselves into the debt-trap, especially for those who are unable to manage their budget and cash-flow matters. According to MAS statistics, the credit card rollover balance has increased from S$1,712mil in year 2000 to S$2,759.8mil in year 2006.
The temptations are everywhere – one bank’s sales pitch for its overdraft facility goes like this ‘you can now have more cash to spend on yourself and your loved ones this coming Christmas (other festivals) and to treat yourself to a well-deserved holiday’. Helpful salespersons at major electrical store would never fail to point out the interest-free installment facilities that would allow consumers to purchase the items of their dreams. And not forgetting the brochures and posters at your friendly neighbourhood post offices that boast of accessible, fast and easy to repay loans up to four times of one’s monthly income.Here are some effective ways to steer clear of the debt-trap:
1. Take control of your financial situation by working out a budget. Assess how much money you earn and how much money you spend. Start by listing your income from all sources. Next, list your ‘fixed’ expenses like mortgage payment or rent, car loan payment, insurance premiums etc. Finally, list the expenses that vary – such as entertainment, recreation, clothing etc. By writing down all your expenses, you will be better able to track your spending patterns, identify necessary expenses and prioritize the rest.
2. Calculate your debt income ratio. This ratio reflects the percentage of your monthly take-home pay that goes to paying debts. A healthy debt service level is usually not more than 40% of your gross monthly income but this is also subject to individual’s financial situation (i.e. stability of income, changes in cash needs, extraordinary expenses etc.)
3. Use your credit card sensibly. Set a budget for your credit card spending and keep track of your expenditures. Do not charge more than what you can afford and to settle your outstanding balance in full every month. Rolling over of your credit card balance will incur interest charges amounting to approximately 24% per annum.
If you are already in debt, here are some possible ways to avoid sinking deeper:
1. Cut up your credit cards. The best way to reduce your credit card debt is to stop using your credit cards. If you have to keep one for emergencies, pick the one with the lowest interest rate. Constantly remind yourself that the emergency card is for true emergencies only and make a commitment that you will not use it unless absolutely critical. Or instead of a credit card, use a debit card.
2. If you have more than one credit card debt, you may want to consider transferring the debt from a card with a higher interest rate to one with a lower interest rate. This will lower the amount of money you are spending towards the interest and hence greater amount of money being channeled towards repayment of the principle.
3. Make extra payments, not just the minimum payments, on your credit cards. Even by paying just an additional $20 extra a month on a credit card can significantly cut your repayment term and interest charges.
4. List down all your credit card debts and pay off the one with the highest interest payment first. Another method is to pay as much above the minimum payment as you can afford on the card with the lowest balance. Continue until the debt is paid in full and then proceed to the next card. Systematically paying off your credit cards one by one will reduce your debts dramatically. The fastest way to eliminate credit card debts is to put every penny you can towards paying off your credit cards.
5. Debt consolidation might help to ease the management of debt payments and in most cases, at a lower rate of interest. There are many Debt Management companies that provide such a service. Under such Debt Management programmes, the consultants will contact your creditors and negotiate with them to have your monthly payments lowered and your interest rates reduced. You can then make monthly payments to the Debt Management companies to have them distribute the funds to your creditors on your behalf so that you no longer have to worry about making payments on the different due dates.
6. Filing for bankruptcy can be a last resort. However, do note that a bankruptcy will remain on your credit report until you are officially discharged, making it difficult to obtain credit, purchase insurance, buy property or even find job in the financial industry.
7. Seeking assistance from Credit Counseling Singapore (CCS) http://www.ccs.org.sg
