5 warning signs your debt is out of control

For the average Singaporean, debts are a normal part of life. Here’s how to tell if your debts are spiralling out of control. For us average folk, debts are an inevitable part of life. At the very least, most Singaporeans have a home loan to settle. But if you’re struggling to keep up with repayments, your debts may have morphed into a debt crisis. Don’t be afraid to seek debt management help from financial professionals if you think you’re in a debt crisis. Watch out for these five warning signs and act quickly.

1. Your debt ratio exceeds 80%

To get your debt ratio, first add up total amount you have to repay each month from all of your debts. With regard to credit cards, use the minimum monthly repayment (either S$50 or 3% of the amount owed). Then compare this amount to your monthly income.

For example, you earn S$4,000 a month. Your repayments for all your loans, every month, comes to around S$3,200. This leaves you with just S$800 a month. This is a precarious position to be in, as a single emergency can cause you to miss payments. You should approach credit counselling services for help as soon as you can, as the situation is likely to worsen. If your debt ratio is 100% or more (i.e. you owe more than you can pay each month), you will need to work out a debt restructuring plan. Credit counselling services like Credit Counselling Singapore will work out an alternative mode of repayments for you, as you will not be able to cope with continued interest payments.

 2. Your credit requests are constantly rejected

Banks and other financial institutions will check your credit score when you apply for a loan or a credit card. The credit score is usually an accurate depiction of your repayment history and the various credit facilities you currently have. For most people, it’s not difficult to get a loan even when in debt – one of the basic techniques of dealing with debt is to pay off a loan with a cheaper loan.

For example, you could get a personal loan at 6% interest to pay off a credit card loan at 24% interest. If you are unable to get a loan, it’s often a sign of a looming debt crisis. Credit scores are good predictors of when someone will default (not be able to pay a loan.) So if you find your credit requests are being denied, you should immediately focus on budgeting, repayments, and closing your credit facilities one at a time.

3. You cannot afford to pay more than the minimum amount

If you cannot make minimum repayments, then your obligations exceed your income and you must get the debt restructured (see point 1). If you find you can only make minimum repayments, you are still in a debt crisis. The minimum repayments may not suffice to cover the interest charged for the month.

For example, the interest on a loan might be S$70 for the month, but you make a minimum repayment of S$50. This is the reason we advise you to always pay your credit card in full. If you only make minimum repayments, note that the minimum may grow over time (e.g. 3% of the amount owed on credit cards), eventually becoming too much for you to manage. Also, it may be impossible to pay off a debt, even over your entire life, by just paying the minimum. Seek debt counselling immediately if you are in this state.

4. You have to choose between basic necessities or debt repayments

If you find each month is an either/or situation where you either eat properly or pay your debts, you are in a debt crisis. It is normal for debts to cause occasional lifestyle difficulties, such as having to give up on a holiday or skip on a pair of shoes. However, you shouldn’t be struggling with basic necessities, such as a phone line or transport fare. As debts will compound, it is vital that you seek help as soon as you notice this happen. The faster you get you your debts restructured or negotiated, the sooner you can get your life back on track.

5. You earn more than the median income but cannot make repayments on time

The median income in Singapore is around $3,700 per month. With this sum in mind, note that only around 5% of Singaporeans with unsecured loans have problems making repayments on time. If you earn more than the median income but still struggle to pay on time, your debt may be out of control. If your late payments are consistent (you miss a few every month), or you have debts that remain unpaid for 90 days, you should consider yourself to be in a crisis.

The solution is speed

The sooner you contact a credit counselling service, the sooner your debt can be controlled. Without someone to negotiate on your behalf, your lenders will continue to impose the standard interest rates, and your debt will snowball out of control. Two to three months can make the difference between a debt that takes a few years to pay off, and one that drives you into bankruptcy.

Ryan is a successful property investor and has been writing about money, saving and spending, and personal finance for the last ten years. His articles have been featured in leading publications including Yahoo! Finance, Esquire, Her World and AsiaOne.

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