Tell when cutting your spending is no longer enough and you need outside help.
Most of this course assumes your debt can be fixed with a better plan: a cheaper loan, a balance transfer, or paying it down with the avalanche or the snowball method. Every one of those plans depends on having extra money each month to send to the debt. You cut spending and send what you save to the highest rate. When there is no extra, that approach stops working. For some people, at some point, a better plan is no longer enough, and you have the most choices if you recognise that point early.
Kumar is 38 and works in retail sales in Woodlands (an invented example). Three years ago he had one credit card and no debt. Then his hours were cut for a few months, his car needed repairs, and his mother had a hospital stay that her MediShield Life and savings did not fully cover. He covered each gap with his cards and a credit line, planning to catch up later. His hours came back and his mother recovered, but the balances stayed and kept growing.
He now owes S$14,000 and S$9,000 on two cards, both at 26%, and S$7,000 on a credit line at 20% (made-up figures). His minimum payments come to about S$915 a month on take-home pay of S$4,500, roughly 20% of what he earns. About S$615 of that is interest: S$23,000 x 26% / 12 is about S$498 for the cards, and S$7,000 x 20% / 12 is about S$117 for the credit line. Only about S$300 a month, the S$915 minus the S$615, reduces what he owes.
Last month Kumar took a cash advance on one card to pay the minimum on the other, something he had promised himself he would never do. As Lesson 2.3, "Cash advances, late fees and other costly card charges", explained, a cash advance carries a fee and interest from the day it is taken. The S$300 moved from one lender to another and left him owing more than before.
The first warning sign is using credit to pay credit, which means borrowing new money to make payments on debt you already have. Kumar's cash advance is one example. Others are:
a balance transfer taken because you can't make this month's payments, rather than to save interest a new personal loan to cover the instalments on an existing loan an instalment plan used to free up cash for bills
Each of these can be made to look like a sensible move. Lesson 3.3, "Balance transfers: a cheap bridge with a fee and a deadline", showed that a balance transfer can genuinely help when it is part of a plan to clear the debt. To test which case you are in, watch which way your total owed is moving. If it goes up every time you borrow to make a payment, the new borrowing is paying for the old and the hole is getting deeper.
The second sign is that the minimum payments alone take so much of your income that essentials suffer. Essentials here means rent, food, transport, utilities, your parents' allowance and your children's school costs. It shows up as these being paid late or cut back so the minimums can go out on time.
To test for it, use the numbers you put together in Lesson 6.1, "Put every debt on one page". Take your income, subtract your essentials and your minimum payments, and see what is left. That figure is your extra repayment money, and both the avalanche and the snowball need it. If the answer is nothing, or you only reached a positive number by cutting essentials that cannot really be cut, neither method can work, because both need extra money to send.
The third sign is about behaviour. You miss payments because the money is not there, as opposed to forgetting a due date. It also includes not opening statements, letting calls from the bank go to voicemail and leaving lenders' letters unread. Avoidance is an understandable response to stress, and an expensive one.
Missed payments bring late fees and interest. They are also reported to Credit Bureau Singapore, and Lesson 1.3, "What moves your risk grade up or down", showed that paying bills or loans late drags down your credit score and risk grade. Ignoring calls closes the door on a conversation that might help, because lenders have more options for someone who contacts them early than for someone who has gone silent.
The cost of waiting builds every month. Interest is added to the balance, a fee is charged for every late or missed payment, and the damage to your credit record deepens. That damage escalates in stages: late payments become months behind, and months behind become defaults.
Your options also narrow as you wait. Some forms of help have conditions on how far behind you can be or how your debts are structured. Someone who seeks help at the first sign has more choices than someone who seeks it after a lender has started legal action. Kumar's debt is large, but it has not yet tipped into defaults, which is why the help in lessons 7.2 and 7.3 is still open to him. Lesson 7.2, "Debt Consolidation Plans: one loan in place of many", and Lesson 7.3, "When to call a credit counsellor, and what they can do", cover that help for people in his position.
Recognising the signs matters more than how bad your situation is today, because help is much easier to use before things get worse. Most people in this position already sense something is wrong, and naming it is what helps them act.
Go through the three signs and the cost of waiting, one at a time, against your own situation over the last three months, and write down plainly which of them apply to you now, if any.
Go through the warning signs one by one and write down which of them, if any, apply to you today.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).