To start, you should add up the total amount of debt you owe. In particular, look at the type of debt you owe: is it a large mortgage you need to pay that is causing a problem? Perhaps you have too much credit card debt? Maybe it’s student loans or possibly some large, unexpected emergency. Many things could have led to this, so don't be too hard on yourself; just start taking action today!
You should probably analyse your spending habits: where is most of your money going? Are you making too many unnecessary purchases While you are speaking to your bank about your debt, you may also want to simultaneously talk to a financial counsellor about what lifestyle changes you can implement to spend less, save more, and be more able to repay your debt.
Next, you will want to assess how much of your income is going into paying off your debt. This would involve calculating your total debt servicing ratio (TDSR), which is the portion of a borrower’s gross monthly income going towards repaying monthly debt obligations. Generally, the TDSR for a borrower would differ from country to country. For example, in the US, it is 36%.
According to MAS, the TDSR in Singapore is 55%. (*Note: from 16 December 2021, the TDSR was tightened to 55% from 60% for new mortgage loans as part of property cooling measures, but the ratio for refinancing existing property loans before this date will remain at 60%.)
Finally, check out your credit score, which incorporates indicators including:
This score tells lenders how likely you are to pay them back. A poor credit score will mean your credit options are limited and more expensive. You can get a credit report from a credit bureau in your country to find out your credit score.
Example credit bureaus:
You should ask your bank to help you develop a plan to reduce and pay off your debt, ideally starting with the debts that have the highest interest rates. The debt with the highest interest rates may not be the largest in size, but due to the compounding effect of interest, you could end up paying more in interest payments than the amount you borrowed in the first place!
As we’ve talked about above, you would also want to keep an eye on your budget. You may want to follow the 50:30:20 rule, dividing your after-tax income into three categories: essential needs (50%), discretionary spending (30%) and savings and investments (20%).
There is no one set debt repayment method! It’s worth calculating which one is best for you!
Under both methods, you’ll prioritise making minimum repayments.
With the debt avalanche method, you pay off the debt with the highest interest rate first: this means that you’ll end up paying less interest in the long run.
With a debt snowball, you’ll still make minimum payments on all your debts, but the idea is to first pay off your smallest debts before moving on to the bigger ones.
Which method you’ll prefer depends on your personal preferences: if you can be disciplined and want to pay less in interest, the debt avalanche method is most likely better for you. If you need more motivation to keep paying off your debts since you see one of the debts disappearing faster, the debt snowball method is for you.
You may want to consider going for a credit counselling session run by a credit counselling service (such as the American Consumer Credit Counseling or Credit Counselling Singapore.) They are non-profit organisations that will help you work through your issues with debt repayment. You should be willing to take their advice and listen with an open mind!
Credit Counselling Singapore (CCS) offers a Debt Management Programme. In this formal consumer debt restructuring agreement, repayment agreements are facilitated on behalf of suitable debt-distressed borrowers, such that they can repay unsecured debts such as credit cards and personal loans in full to creditors.
However, taking part in this programme would be a drastic measure, as all existing credit cards of the borrower would be cancelled. Whatsmore, the borrower’s participation in this programme would be reported to Credit Bureau Singapore and shown in the credit report. Future credit or loans are unlikely to be approved by creditors, and a borrower’s creditworthiness would have to be rebuilt.
You would also have to meet some specific criteria, so do check thoroughly with your bank or financial counsellor if you are eligible for this programme and whether you should take it up if you are.
Another avenue for you to tackle repaying your debt is a debt consolidation programme. Debt consolidation means a borrower with multiple debts can apply for a loan to combine and pay off those debts over a particular period. Typically, this loan is offered at a lower interest rate than paying back the original debts. However, this raises the question of why would your creditor allow you to pay off your debt at a lower interest rate? A lower interest rate means the likelihood of full debt repayment increases. Note that debt consolidation does not erase the original amount of debt. Instead, it just makes the repayment process slightly more straightforward.
One of the more popular forms of consolidating debt is transferring high-interest card debt to a balance transfer credit card. A balance transfer could save you money based on the lower interest rate. However, make sure that you still make your monthly minimum payments on time or you risk losing the low interest rate (and having late fee charges added to your debt!)
However, with a debt consolidation loan, you generally get to choose your loan tenure or how long it would take for you to pay off your loan. Most would prefer to lengthen the loan tenure to make monthly repayment amounts smaller (and more predictable), even if the end result is paying more in total interest since the purpose for many is to reduce the crushing burden of the monthly payments. Of course, if you want to reduce the total amount of interest you pay, you could set a shorter loan tenure - but ensure that you can manage the higher monthly repayment amounts!
If you’re unsure about your amortisation schedules, use a loan calculator and check if debt consolidation is the best plan for you.
Also, check with your bank on the types of fees associated with your debt consolidation plan. There could be fees related to:
One prominent risk of taking up a debt consolidation plan is that it may cause a temporary dip in your credit score. This is because your application for a new loan to combine all of your previous debt would trigger an inquiry on your credit report. Still, if you keep making your monthly repayments on time and avoid taking on new debt, your credit score could see a boost after a short-lived fall.
Your family may be able to help you with sticking to your budget and spending within your means. After speaking to your bank about managing and repaying your debt, you could ask your family and friends to keep you accountable to your spending limits and make sure you adhere to the timely monthly repayments.
As a wrap-up, let’s go through a few key questions to ask yourself when you have too much debt before you go to see your friendly banker: firstly, what is the total amount of your debt, and what is your current credit score? What types of debt do you owe, and is there a certain type that you should repay first? Next, what is a good budget for repaying existing debt/preventing future debt? Lastly, should you consider taking up a formal debt management programme or debt consolidation plan, and what are the risks involved?
When you do see them, it’s important to remember that your banker wants to help you repay your debt. If you default on your loans, it’s not just bad for you, but it’s bad for them as well. Don’t be afraid to ask her for the help you need, and don't be too shy to ask any questions you need to clarify all of your doubts!
WHAT TO ASK YOUR BANK WHEN YOU HAVE TOO MUCH DEBT? COMPLETED. ✅
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