Image: Ivan Kruk / 123rf

You shouldn’t have credit card debt. If you pay in full every month, like you’re supposed to, this is a boat you’ll never board. But maybe you were forced by a real emergency (e.g. medical crisis, burst pipes, Wii-U early release). In which case, you’re in the unenviable position of paying a high-interest debt. And credit card debt grows faster than unemployment rates after the National Tattoo Convention, so you better have a good plan to pay it down fast:

1. Don’t Skip Saving to Pay Down Debt

You know why your debt exists in the first place? Because you didn’t save enough. If you’d set aside the cash you needed, you wouldn’t have had to use your card.

So now you throw huge chunks of your income at the debt; but it’s like trying to patch a torpedoed cruise ship with the contents of your wallet. You continue to have no savings, because the debt consumes everything you’ve got.

And when the next emergency comes along, all your repayment progress is wiped out. You have no savings, and you’re forced to use credit again. And yes, I know that will happen. Because emergencies are poverty-guided missiles.

Emergencies happen to the financially-distressed first. Met any poor people before? You might notice they seem to have more emergencies in life. They’re not making up sob stories. The poor are so busy dealing with overheads (e.g. debt), that even a minor mishap becomes a full-blown crisis.

If you’re putting most of your income into your debt, for example, then even a $50 doctor’s bill can force you into using more credit. It’s a vicious cycle.

To escape this, set aside some savings (at least 10% of your income). Do this even when you’re paying down the debt. When there’s an emergency, take the money from these savings, rather than use your card.

2. Negotiate a Debt Management Plan if the Debt is Too Big

Sometimes, your credit card debt is too big to handle. You may have no income to repay the debt, or perhaps the compound interest means eventual repayment is impossible.

In this scenario, you need to call a credit counsellor immediately, and negotiate with the bank. The bank’s interest is in getting their money back, not revenge; so they’d rather work out a plan than seize your stuff (auctions seldom recover the cost of the debt).

Don’t take your time. The longer you wait, the worse your debt becomes. And while the bank won’t write off your debt, they might shrink the interest or stagger repayments. The sooner you let them know, the more forgiving they’re likely to be.

You can also follow us on Facebook; our articles will teach you to negotiate right.

3. Do Not Transfer the Debt

There are some finance websites which recommend balance transfers. That is, switching the debt from a high interest card to a lower interest card. That might work in America, but not in Singapore.

For starters, there aren’t wildly diverging interest rates on local credit cards. Every card is around 24% per annum. There may be slight differences; such as 24.5% per annum or 24.3% per annum, but that’s about as different as they get.

Visit card comparison sites like MoneySmart and see for yourself. This is why most Singaporeans pick cards based on rewards, not on interest rates.

Anyway, doing a balance transfer from one card to another has negligible effect. We’re talking less than one percent difference; you’re not any richer because you owe half-a-cent less. On top of that, there’s often a transfer fee of about 1.88% (of the total debt transferred). This would cause a balance transfer to add to your credit card debt.

4. Don’t Pay More Than You Can Manage Per Month

Don’t let the debt repayments take up more than 50% of your income. You may think that the faster you close the debt, the less interest you’ll end up paying.

But if you repay so much that your wallet’s empty for the month…well, see point 1. Not only can’t you save, you’ll risk running out money before the next pay cheque. Then out comes the credit card again, and you’ll undo most of your debt recovery.

It could mean this month’s debt is due to trying to repay last month’s, and that’s the definition of a “poverty chain”. So do pay above the minimum, but play it like a boxer. Take small jabs and wear down the debt; don’t try to knock it out at one go.

Or you’ll over-extend yourself, and the next unexpected cost will break you.

 

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