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It’s much better if you learn these lessons without amassing a huge credit card debt. For a fair number of young Singaporeans, the first major financial shock comes in the form of a credit card bill. Most people aren’t aware of just how quickly uncontrolled spending will add up – and paying off that first S$10,000 debt becomes a rite of passage.
But as the old saying goes, fools learn from experience, while wiser people learn from the experiences of others. Whether or not you have a S$10,000 credit card debt, these lessons are worth knowing:
It begins with denial. You won’t be able to understand how the debt reached S$10,000. As far as your brain is concerned, all you bought was a few meals, a pair of shoes, and one pair of concert tickets. What happened? Did you mysteriously black out during the other purchases? Actually, you kind of did.
Numerous studies have shown that credit cards increase the amount you’re willing to spend. The part of your brain that warns you against overspending seems to switch off whenever you’re holding the card, which encourages impulse spending.
In a famous study by Richard Feinberg, it was revealed that even showing you a credit card logo increases your willingness to spend. Also, when you don’t take the money out of your wallet, you don’t feel the sting of spending. As a result, you’ll buy more impulsively, and in larger quantities. And you often don’t realise just how much a credit card has confused you, until the first time you see a spectacular bill. This is why at SingSaver.com.sg, we tell people to review their credit card statement at least once every three days. This is the surest way to remind yourself of how much you’re spending, and when you need to stop and leave the card at home. Don’t review it only at the end of the month – by then, you might see a monstrous debt.
After three or four months of desperate repayments, you’ll check your debt to discover it’s been reduced by…practically nothing. When the debt is large enough, the credit card interest rate alone (around two per cent per month) chews up a large part of the repayment. For example:
Say you owe S$10,000 on a credit card, at an interest rate of 24 per cent per annum. If you were to pay S$1,000 every month, without ever using the card for more purchases, it would still take you at least one year to pay off the debt. But S$1,000 a month for a year seems painful right?
Okay, let’s say you pay S$200 per month. Then it would take you, oh…infinity years to pay off the debt. You’ll die owing money, because the repayment is not enough to even pay off the interest. And this is what will drive you over the cliff: you’ll pay a huge chunk of your salary every month, but either nothing seems to improve, or your debt actually seems to get worse. Then you’ll realise we weren’t kidding around when we say credit cards aren’t meant to be used that way. You’re supposed to pay off the entire amount you owe, not “leave a little bit” unpaid all the time. It snowballs, and once the debt reaches critical mass, it’s harder to kill than Nicholas Cage’s acting career. Which then leads to the next lesson.
The first time you find out about balance transfers, you’re like a plane wreck survivor who hears a helicopter overhead. This is the one “bonus life” feature given to those who are about to lose the financial management game. The idea behind a balance transfer is simple: you shift the debt from credit card A onto credit card B, usually for a fee (about 1.5 per cent of the debt transferred). You can then close credit card A, with no history of default. In most cases, credit card B will give you a limited time period – often six months – during which you are charged zero interest. This is your opportunity to pay down as much of your debt as possible (maybe even all of it) without having to pay the interest.
You can always identify those who are in credit card debt – they read about balance transfers like a starving orphan gazing into a cookbook. For everyone else, balance transfer articles are about as exciting as window-washing. If you need a zero interest balance transfer, you can try looking for the latest bank offers on SingSaver.com.sg.
Don’t bother trying to explain your issues to anyone except (1) actual financial experts, like a credit counselor, or (2) people who have been in the same boat. Other people will just get smug, and explain how they will never end up in such a situation. Either because they don’t use credit cards at all (not as brilliant a move as they imagine, as they’ll learn when they try to take a home loan with no credit score), or because they assume they’re more prudent (few people actually are, most human beings have the same spending habits).
Whatever the case, you’ll get an earful of advice on where to buy pants for S$2 cheaper, or get shown interest rate charts for savings. Most of it will just annoy you and contribute nothing helpful. Just go straight to a qualified expert. A good place to start is Credit Counselling Singapore’s free info talk on debt management; you can avail of their credit counselling services afterwards.
It’s like a hangover. You’ll swear you’ll never drink again, but odds are you will after a weekend or two. There is a strong temptation to charge more to the card, especially since repayments eat into your monthly pay. Then you run short, and end up using the card again.
Take our advice here – if you have credit card debt, lock the card away. Do nothing with it until it’s repaid in full, then you can think about using it again. Meanwhile, use these mind tricks to control your credit card spending and keep your impulses in check.
Remember what we said about balance transfers in point 3? It applies to personal loans as well.
A personal loan has an interest rate of around six to eight per cent per annum. You can take a personal loan for S$10,000 (assuming you can get one) and pay off your entire credit card debt. And then pay off the (much cheaper) personal loan. That’s one of the functions a personal loan serves. We don’t suggest you make a habit of this – you’re still losing money because you’re paying interest. But it won’t drive you into the ground like uncontrolled credit card debt. You can find out more about the lowest interest rates in Singapore through SingSaver.com.sg.
Paying off a huge unsecured debt is a valuable learning experience. For years after, you’ll be telling the story of how you once owed S$10,000 and barely managed to pay it off. On the upside, most people come out of this more confident in the way they handle loans and get more careful with their personal finances. And if you didn’t understand how credit cards worked before, you’ll become quite the expert at paying your bills on time and overcoming debts after the situation’s resolved.