PHOTOGRAPH: Rattanachai Bunying, 123rf.com
You should not have any credit card debt at all. But if you do, don’t make the mistake of neglecting savings while trying to rush repayment.
Many Singaporeans get stuck in a “debt cycle”, which leads to never fully settling accounts. Here’s how to escape it.
Never Skip Saving to Accelerate Debt Repayment
If you have rollover debt on a credit card, you might feel inclined to pay it off as soon as possible. This is a partially correct idea, as the longer you leave the debt the more the interest will snowball. However, you cannot ignore savings in order to pay off the debt faster. Doing so could result in a debt cycle. For example:
Say you have about S$2,000 a month, after CPF deductions and living expenses. You have a sizeable credit card debt of S$8,000. What happens if you spend all S$2,000 on trying to clear your debt, and save none of it?
In the best case scenario, nothing will go wrong. In practice, there are always unexpected costs. What if you need to get a bad tooth pulled after you’ve put all the money into debt repayment? What if you need money for urgent plumbing or electrical wiring at home?
Odds are you will pull out your credit card again, and start using credit. This will undo any debt repayments you have made, and the next month the cycle will repeat itself.
The key is to save a little while repaying more than the minimum sum. So in the above example, you could save S$1,000 for emergencies while making repayments of S$1,000 every month. This will prevent you from having to use more credit during emergencies.
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(Do not use your credit card again, not until the entire debt is repaid)
Here’s how to manage the dual aspects of saving and paying off your debt:
1. Use a Balance Transfer to Keep Interest Rates Down
If you want to accelerate your debt repayments while still saving, consider a balance transfer in Singapore. This allows you to shift your debt onto another credit card, with an important bonus: for a time period (often six months) there will be no interest charged on your debt.
As credit cards have a compounding interest of 2% per month, a significant portion of your debt repayments goes toward just paying the interest. By removing the interest, you will significantly speed up your repayments. You can find the best credit cards for balance transfers on SingSaver.com.sg.
2. If You have Multiple Credit Cards, Consolidate Your Debt
Avoid splitting your debt across multiple credit cards. This makes billing cycles harder to track, and you could end up paying more if one of the cards has higher interest rates (most credit cards charge 2% per month, but some charge a bit more. Some banks will also charge significantly higher interest if you are repeatedly late on repayments).
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Shift all the debt onto a single card, preferably as a balance transfer (see point 1). This will make it easier to split between your savings and your debt repayment.
3. Do Not Use Your Credit Card Until Your Debt is Fully Paid
There is no point saving or repaying your debt if you continue to use your credit card. You should only start charging to it again when your debt is completely cleared, and never before. Using this approach, you will be able to pay off your credit card and still have a reasonable amount of savings after clearing your debt.
This article was originally published on Get.com.