If life begins in your 20’s when you start to earn your own keep, then your 30s is when life really kicks into high gear. It is the time when most people get married, buy homes, and have children. It is precisely at this stage of your life when you need to watch your credit worthiness. Managing debt and remaining as debt-free as possible ensures that you stay on course to financial security.
1. Clear your credit history
Credit card bills are the surest and easiest way to get into debt. According to the Credit Bureau Singapore, in 2011, the total number of delinquent debtors (those who pay nothing or less than the minimum sum on their credit card debts) was a little over 73,000. By 2015, the number had risen to over 100,000. Here’s another scary statistic. Credit Counselling Singapore recorded the biggest credit card debt in 2015 – over S$1.5 million.
Credit card debts accumulate easily. That’s because the annual interest rate on them is very high – 15-25%. So, if you spend to your credit limit of S$5,000, and only pay the minimum sum (usually 3% to 5% of your debt) of S$150, the next month you will have to pay off S$4,947 (at 2% interest a month). This really means that though you paid S$150, you only made a S$53 dent in your debt.
Continue to pay only the minimum amount, and it will take you over six years and nearly S$3,000 in interest to clear that S$5,000 debt. And that’s if you never charge anything else to that card ever again, which – let’s face it – is hardly a realistic scenario.
The picture gets even more dismal. If you don’t make a minimum payment on time, it will affect your credit repayment record. This report is used by lenders to decide your credit worthiness. You might find it harder to get a car or house loan, or have to pay higher interest rates.
2. Borrow carefully
In Singapore, it’s difficult to get through your adult life without taking a loan or two. Understanding your Total Debt Servicing Ratio (TDSR) will help you prioritise these loans.
Your TDSR is your combined debts – anything from car to home, renovation, student and personal loans plus your credit card debts. It can’t be more than 60% of your income. Take out one loan too many and you may find that you cannot borrow any more for the things you might really need – like a home.
3. Pay off your debts wisely
Prioritise your debt payment according to the interest rates charged. Credit card debts should be the first you clear because of the 24% interest rate. Even taking a personal loan to pay off your credit card debt is better. Personal loans can have flat annual interest rates as low as 3.53% per annum or effective interest rates of just 8.33% per year. That’s a big difference compared to credit card loans.
Car and home loans tend to be lower in interest rates. Both usually do not go beyond 3%. If you have the cash, hold off clearing these debts. Paying off low-interest rate loans simply reduces your liability; it doesn’t increase your net worth. You would get more out of it if you invested the money instead.
Even by modest estimates, you are likely to reap more than 3% of returns on your investments. The returns would cover the cost of your loans and still earn you a little more – investing wisely never goes out of style!