If you use your credit cards right, you shouldn’t end up in debt (just repay the balance in full, every time). Still, there are going to be some people who’ve landed themselves in debt. To dig yourself out, the first step is to remove bad habits like these:
1. Don’t use credit cards to pay other credit cards unless it’s a zero-interest balance transfer (and even then, only when you’re ready)
You can, indeed, pay a credit card bill with another credit card. However, we don’t recommend it.
First, you’re not going to get points, cashback, air miles, etc. from doing this. There’s no transaction with any merchant, so it doesn’t count as retail spend. Please don’t bounce your credit card debt from one card to another, thinking you’re somehow racking up rewards. Which leads us to the second thing:
When you pay a credit card with another credit card, what you’re doing is called a balance transfer. There’s a fee involved, which varies based on the bank; but it’s usually at least 1.5% of the amount transferred.
If you keep bouncing your debt to and from credit cards, that amount can accumulate into several hundred dollars, making your debt worse.
There’s only one time when you should consider making a balance transfer. That’s when use a zero-interest balance transfer, to pay a credit card bill with another credit card. After the initial fee (the aforementioned 1.5% of the amount transferred), you usually have six months to repay the entire debt on the new card, with no interest charged during that time.
After that, the interest rate goes back to normal.
This is worth doing, if you’re confident that you only need six months to square away the rest of your credit card balance.
2. Saving absolutely no money, and throwing all your cash into big repayments
You need to save some money, even as you pay down your credit card balance. Otherwise, you could end up trapped in a vicious cycle.
For example, say you have $1500 a month, after paying for necessities. You decide to throw all $1,500 into repaying your $5,000 credit card balance – the faster the better, right?
But later in the month, something unexpected happens. Your dog needs a you’re your laptop broke and you need a new one, you scratched someone’s car and need to pay for it, etc.
With no money in your account, you may be forced into using credit again. You can get trapped in a cycle of emptying your bank account for repayments, getting into more debt due to the lack of emergency funds, and then emptying out your bank account to cover the debts again.
No matter how eager you are to repay your balance, never completely empty your bank account to do it. Always keep some cash on hand for emergencies (as a rule of thumb, this should be at least 10% of your monthly income).
3. Not using a cheaper loan to pay off credit card balances
The easiest way to deal with credit card balances is to consolidate your debt. You can do this by using a personal instalment loan – which has a lower interest rate- to repay your credit card debt.
A credit card has an interest rate of about 26% per annum. A personal instalment loan, however, has a rate of just between 6-9% per annum.
So if you owe $5,000 at 26% on a credit card, for example, you should consider taking out a personal instalment loan for $5,000 at just 6% per annum, to pay off the credit card.
Sometimes, personal loans can be even cheaper than this. For example, the HSBC personal loan on GoBear.com has an interest rate of just 4.5% per annum. Transforming your credit card debt to a personal loan means you’ll repay it a lot sooner, as the interest rate doesn’t compound as quickly.
4. Waiting too long to seek help
If your credit card debts are affecting your way of your life (e.g. you can’t sleep at night thinking about them, and they distract you from work), it’s time to seek help. Look for organisations like Credit Counselling Singapore (CCS), who can help you restructure payments to the bank.
Speed is of the essence: due to the nature of compounding interest, your credit card bill gets worse the longer you wait.
If you get help fast, your bank can enrol you into Debt Consolidation Products (DCPs). These will freeze your credit until your loans are paid off, but it ensures that – if you follow the plan – you will be debt free at the end of it.
Some Singaporeans don’t want to approach credit counsellors or banks because they’re afraid it will hurt their credit score. They’re correct; your credit score does take a big hit, when the bank restructures your loan. However, your credit score will be even more badly damaged, if your debt grows to the point that the bank must write it off. When that happens, you’ll be in default – you may never be able to get a loan again, even for important things like home loans and education loans.
Remember, the sooner you find help, the sooner you’ll repay that debt.
5. Continuing to use the card, right after you’ve used a loan to pay it off
So you’ve used a balance transfer, or a personal loan, to pay off your credit card. Congratulations, and your next step is to stop using that card.
If you can’t resist the temptation, you may even want to cancel the card, right after using a personal loan or balance transfer to pay it off.
Just because the card’s balance is paid, that doesn’t mean you’re debt free – all you’ve done is transferred your debt, and lowered the interest rate. If you start using the card again, you’re going to make your situation worse than before: now you’ll have two different debts to repay: the transferred amount, and the new loans you’re ringing up.
You can pay off your credit card debt, with discipline and a clear plan
Sometimes, it’s as simple as leaving your card at home until it’s paid off. While you’re waiting for that to happen, automate your credit card repayments (speak to your bank to find out how).
If you do this, it’s possible to just leave your card in the sock drawer for a year, and then wake up one morning to find out your debts are cleared. Speak to a financial adviser, to work out the right repayment plan.