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Credit Card Debt Repayment – Guide to Your Options for Reducing Interest Rates

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There is no denying the fact that credit cards are probably one of the most helpful financial tools out there. They not only help you manage your cash flow by allowing you to spend now and pay later, but they also help you stretch your dollar thanks to the various rewards (cashback, cash rebate, air miles, and reward points) they offer.

That being said, they are also the reason why most people find themselves in debt.

Being buried under a mountain of credit card debt is both frustrating and scary. Digging out of it, even more so.

But it isn’t impossible.

We know, that some of you may be thinking that none of this is something you haven’t heard before. Mostly because you’ve tried tips such as ‘freeze your credit card’, but were never successful at making sure that credit card debt stayed away.

In our opinion, this has more to do with these so-called solutions and less to do with your ability to successfully get out of debt.

To help you gain control over your finances, here are credit card debt repayment options that you can take advantage of:

1. Tackle debt one card at a time

Wanting to be debt free once in for all is something all of us wish for, but unless we win the lottery there is no way we can pay all our debt in one go. (Sometimes even winning the lottery may not be enough to completely pay our debt).

In such cases, the most practical thing to do is tackle your credit card debt one card at a time.

Here’s how you do it:

  • Open an excel sheet, a word document, or put pen to paper and list out all of the credit cards you own.
  • Next, list down the interest payable on each of those cards every month.
  • Now, write down the outstanding balance you have on each of these cards.
  • The next step is to put down the minimum amount you need to pay for each card.
  • Now total the amount you owe and the minimum amount you need to pay per month on all of your cards.
  • The final step is to take a deep breath and not get overwhelmed by all the numbers.

Once you are done, your table should look something like this:

Card Interest Rate Outstanding Balance Minimum Monthly Payment
Card A 26.88% p.a. S$4,200 S$126 (3% of the outstanding balance or S$50, whichever is higher)
Card B 26.9% p.a. S$3,000 S$50 (1% of the balance or S$50, whichever is higher)
Card C 28.88% p.a. S$7,200 S$216 (3% of the balance)
Total S$14,400 S$392

So, now what?

Well, the first thing to do is determine how you want to start paying your debt. This can be done in two ways:

  1. You can start by tackling the card with the highest interest rate.
  2. You can start by making payments for the card with the lowest outstanding balance.

Let’s say, that your monthly income is S$3,000. After deducting all other necessary expenses (such as rent, loan payments, utility bill payments, etc.), you put aside S$700 to repay your debt. This is how you can pay your credit card debt and gradually reduce interest payments with both of these options.

Read: 8 Clever Tricks Online Shopping Websites Use to Make Us Open Our Wallets

Option 1: Highest interest rate paid first

If you decide that this is the best way to pay your debt, then you start by dealing with Card C. This credit card’s interest rate is 28.88% p.a. This means that each time you pay only the minimum amount on this card, thanks to the high rate of interest and the fact that the interest payable by you is compounded, the outstanding balance continues to increase.

Now, if we go by our example, we know that the minimum amount for all 3 cards is S$392. You have decided to put aside S$700 each month towards credit card payments. So, you put in the remaining S$308 (S$700 – S$392) in repaying the balance for Card C. Which means that you will be paying S$524 each month towards clearing up the balance on Card C.

Once you tackle Card C, you move on to Card B. The same S$700 is then used to pay the debt on your remaining two cards. So S$126 towards Card A and the remaining S$574 towards Card B.

Read also: 5 Ways to Save on Your Credit Card Bill

Option 2: Pay the lowest amount first

If you are one of those people who find it hard to stay motivated to pay your debt slowly (since you don’t see any change at all), start by repaying the debt on the card with the least outstanding balance. This way, once you clear the balance on the first card, your motivation to continue will become higher!

Taking the same S$700, you first work towards paying the debt on Card B (while still making minimum payments on the other two cards). In this scenario, you pay S$358 towards Card B.

Once you have finished paying the balance on this card, you move to Card A (for which you pay S$484) and then move to pay the outstanding amount on Card C.

This way, you are always motivated to pay your credit card debt!

Related: The Ultimate Guide to Choosing a Credit Card

2. Take up a balance transfer

To determine if a credit card balance transfer will benefit you, it is important to first understand what balance transfers are and how they function.

What is a balance transfer?

If you have debts on multiple credit cards, you could transfer this debt to another credit card which offers a lower rate of interest. Continuing with our example from earlier, instead of having to make payments for 3 credit cards, with a balance transfer you only have to make one payment.

As a result, a balance transfer is a great way to reduce the interest payable on your credit card debt.

Moreover, most banks have promotional offers such as 0% interest balance transfers for 6 to 12 months. The only amount you will have to pay is a one-time administration fee.

Read: Feeling Broke? You’ll Need This List of Money-Saving Tools for Working Adults

That’s the definition of a balance transfer, but here are things you need to know:

  • There may be chances that you can’t transfer your entire credit card debt. Wondering why? This is because a balance transfer credit card also has a credit limit. So, you can only transfer an amount up to the available credit limit of the new credit card.
    • In our example, the total credit card debt was S$14.400. If your monthly income is S$3,000, then your credit limit is 4 times your monthly income (S$12,000).
    • This means, that you can transfer debts only up to S$12,000. Which also means that in our example you can transfer the balance on only 2 cards since you can’t make a partial balance transfer.
  • Once the 6-month or 12-month interest-free period is over, the interest you will be charged will be the effective interest rate (EIR) for that particular credit card.

Related: 7 Aspects of Life You Need to Declutter to Save Money and Stay Healthy

Consider a balance transfer if:

  • You have a significant amount of debt on multiple cards.
  • You have enough money to repay the entire balance transfer amount within the interest-free period.
  • If you don’t, then the whole purpose of a balance transfer is defeated.
  • You are willing to pay more than the minimum payment amount monthly.
  • This credit card is not used for retail purchases since all retail transactions will be charged the regular rate of interest and this will only add to your debt.
  • You are willing to not repeatedly make a balance transfer since this can adversely impact your credit score.

3. Consider a low-interest personal loan

Personal loans are also a great way to pay your credit card debt and reduce the interest you pay every month.

The two types of  low-interest personal loans that you can use to pay your card debt are:

  1. Personal instalment loans
  2. Personal line of credit

Check out: 6 Things About Unsecured Loans You Must Understand Before Using One

Personal instalment loan

The EIR on most personal instalment loans in Singapore start at around 7% p.a. Of course, the interest you ultimately do end up paying depends on the loan amount and the tenure of the loan. In general, the longer the loan period, the lower the interest rate. But a longer loan period also means that you end up paying more as interest.

That being said, a low-interest rate shouldn’t be the sole criterion on which you base your decision. Remember, that once you clear your credit card debt you will have to pay the monthly instalment on your personal loan. So, if you cannot manage your monthly payments, then you will probably land yourself in debt once again.

In our example, the credit card debt amounted to S$14,400. Let’s say you decided to take a personal instalment loan from HSBC. The loan amount you would be eligible for would be S$12,000 (4 times your monthly income).

Here’s what your minimum monthly payment for the personal instalment loan would look like at different tenures as per HSBC’s loan calculator:

Tenure (Years) 1 2 3 4 5 6 7
EIR (p.a.) 13% 13% 9% 9% 9% 9% 9%
Monthly payment amount S$1,072 S$571 S$382 S$299 S$250 S$217 S$194
Total amount payable S$12,863 S$13,704 S$13,752 S$14,352 S$15,000 S$15,624 S$16,296

Continuing with our example, with a personal loan of S$12,000 you can pay the amount you owe on Card A and Card C. You can then use the S$700 that you have put aside to pay S$571 for your personal instalment loan and the remaining S$129 on Card B.

So, you not only get to be debt free, but you also end up paying a low rate of interest.

Related: Beginner’s Guide to Taking a Personal Loan

Personal line of credit

Unlike a personal instalment loan, with a personal line of credit, you only end up paying the amount that you use. This means that if you have a credit line of S$12,000, and you decide to use only S$4,000. You will have to pay interest only on the amount used and not the entire amount in your account.

What you need to do is ensure that you choose the right type of loan to help clear your debts.

Read: What You Need to Know About Licensed Moneylenders in Singapore

4. Apply for a Debt Consolidation Plan (DCP)

There may be a situation wherein your debt is 12 times your monthly income. In such cases, you can always consider applying for a DCP.

A DCP allows you to consolidate all your unsecured debt across various financial institutions with one financial institution. This is a great way to work towards paying off your debt at a lower rate. In fact, unlike personal loans where you can generally borrow only up to 4 times your monthly income, with a DCP the concerned bank provides you with a loan that covers most (if not all) of the debt you owe.

Related: What is a Debt Consolidation Plan and How Does It Work?

Consider applying for a DCP if:

  • You have unsecured debt that is 12 times your monthly income or higher.
  • Your annual income is between S$20,000 and S$120,000 and your net personal assets are less than S$2 million.
  • You are unable to juggle multiple payments to multiple banks.
  • Spreading your payments over a long period of time is something you wish to do.

You may like: Managing Debt: 3 Essential Things to Remember in Your 30s

How else can you reduce the interest rate on your credit cards?

A very easy and often less talked about method to lower credit card interest rates involves picking up the phone and talking to the bank. Better yet, go to the branch with which you bank with and request the representative to lower the interest on your credit card.

If you have generally been a customer who has always made their payments on time and are facing a sudden shortage of cash (maybe because of a medical emergency or loss of a job), banks are more often than not willing to lower interest rates.

Remember to negotiate for terms of payment when you think you are at the edge of a debt trap and not already in debt since you will be able to bargain better.

Despite this, if you are met with a stone face, don’t let that get you down because there are other options for you to consider!

Congratulations on taking the first step towards a debt-free life! It isn’t easy, but the end result is extremely satisfying!

You may also like:

  • In Debt? These 2 Repayment Methods Can Help You Pay It off Faster
  • When is Debt Better Than No Debt? 3 Examples That Show You How to Decide if Debt is Good or Bad
  • Financial Woes? Here Are 8 of the Best Financial Decisions Made By People Around the World

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