Many people don’t understand the cost of borrowing. As plastic beckons with its attractive promotions, individuals are spending more and chalking up larger amounts on their credit cards. On the other hand, there are also individuals who are living paycheck-to-paycheck with no financial cushion due to living beyond their means.
Those who are in that situation generally get there by spending everything they bring home. The next thing they know, the cards are all maxed out, and their credit scores have reached an all-time low.
Staying in Control of Your Debt
There’s no gauge to tell you when your debt is getting out of control. Banks are not going to send you daily reminders about your overdue balances, and they definitely won’t inform you once your bill has exceeded your affordability to pay. Here are a few methods to help you stay on top of your debt.
1. Know What You Owe
it’s important to take control and have a clear idea of how much you owe along with who you owe it to. Review your income and savings and come up with a detailed plan as to how you can start paying back your credit card debt. For example, you might want to pay off the debts with the highest interests first.
Furthermore, lenders like to see plenty of breathing room between the amount of debt reported on your credit cards and your total credit limits. If you are in debt, take time to examine your options and select those that will help you the most to make your payments manageable.
Your first stop in finding a solution could be debt consolidation. You can apply for a Debt Consolidation Plan (DCP) to help repay your debts from unsecured credit facilities such as credit cards, overdrafts and personal loans. The more debt you pay off, the wider that gap and the better your score will be.
2. Take Notice of Your Spending
If you don’t know what you’re spending your money on, you won’t know where to cut expenses. Write down every single item that you are responsible for each month before strategically cutting out unnecessary expenses. This includes keeping track of your daily coffee and that shirt you bought during a sale. There are plenty of budgeting tips and apps that can help you do this.
Some of these cuts may save you only a few dollars, while others can amount to bigger savings. You may consider cutting down on a major expense such as a car payment (eg. through refinancing or trading in your car) to improve your overall financial health. Alternatively, you may opt to eliminate smaller expenses like cable TV, restaurant meals, and gym memberships that may add up to a significant sum by the end of the year.
3. Credit Counselling
Lastly, don’t be afraid of credit counselling. If you have made numerous attempts to pay off your debt but failed to do so, consider working with Credit Counselling Singapore which helps people with unsecured consumer debt problems through credit education and debt management programmes.
Note: Default records stay on your credit report for 3 years upon full or negotiated settlement, while bankruptcy data is retained for 5 years from the date of discharge from bankruptcy.
Maintaining Your Credit Score
While there is no specific formula for calculating the exact weightage of how much a particular bad debt will affect your credit score, typically, the higher the loan amount and the more recent the debt is, the greater the impact.
Therefore, borrow only what is needed and spend only what you can afford to pay off in a month. Use your cards from time to time to generate a history of on-time repayments, as this is the best way to demonstrate that you are responsible with your finances. Your score will, in turn, reflect these smart spending behaviours.
Read more: Credit Score and How to Improve It
If you have applied for a new credit facility in the last 30 days with any of CBS member banks and financial institutions (view list of CBS members here), you can receive a complimentary copy of your credit report from CBS. Otherwise, you can purchase your report online to understand your credit report better.