Explain what a Debt Consolidation Plan does and what you have to do to make it work.
A Debt Consolidation Plan (DCP) can let you move several card and credit line balances from different financial institutions to one participating institution, which pays off your other lenders. It only helps if you qualify and if the offer costs less than the path you are on now.
On the first of the month, Kumar (an invented example; all his figures are example figures) has three statements on his kitchen table. One is from a credit card with one bank, one is from a second card with another bank, and one is from a credit line with a third bank. He has three due dates, three minimum payments and three different rates. None of the three lenders knows his full total, because only Kumar sees all three statements. He has started avoiding opening the envelopes.
Kumar owes S$30,000 in total. That is S$14,000 on one card at 26%, S$9,000 on the other card at 26%, and S$7,000 on the credit line at 20%. Together these cost him about S$615 a month in interest alone. His three minimum payments come to about S$915 a month, and only about S$300 of that reduces what he owes.
A DCP is offered by participating financial institutions in Singapore. It lets you move your unsecured credit card and loan balances from several financial institutions to one participating institution, which pays off your other lenders. You are also automatically given a revolving credit facility, which ABS describes as a convenient way to pay for your daily essentials. The ABS page does not describe a single interest rate or a fixed instalment over a set term, so read the plan's own terms to see how your repayments will work. Without a DCP you keep managing several balances, several rates and several due dates. With your debts spread across lenders, no single lender sees the full amount you owe, because each bank sees only its own part.
Kumar's cards and credit line are revolving debt. There is no date by which the balance must be cleared, the rates are high, and paying only the minimum can keep the balance going for years. Lesson 2.2, "Why the minimum payment keeps you in debt for years", explained how that happens. A DCP brings those balances together with one institution. Because the plan also comes with a revolving credit facility, check the plan's terms for how you repay the consolidated balance.
Banks in Singapore created the scheme together for borrowers whose unsecured debt has grown large compared with their income. The Association of Banks in Singapore (ABS) explains how the scheme works and keeps the list of participating banks on its website, abs.org.sg.
The two main eligibility factors are your income and how much interest-bearing unsecured debt you have compared with that income. Other conditions also apply, including your citizenship or residency status. The scheme sets its own thresholds and may change them, so check the current criteria with a participating bank or on the ABS site before you apply. A threshold you heard from a friend or read in an older article may be out of date.
You can consolidate cards and credit lines with banks and other financial institutions. The DCP covers only unsecured debt with financial institutions, so secured loans fall outside it. ABS also lists some unsecured debts that are excluded, such as joint accounts, renovation loans, education loans, medical loans and credit facilities granted for businesses or business purposes.
The scheme treats a DCP as a clean restart on repayment, and its conditions are meant to stop old habits from coming back. After you sign, you are expected not to take on any new unsecured debt. Your remaining credit cards and credit lines are usually closed or suspended, and your access to credit may be limited for as long as the plan runs. Each plan's terms state which facilities are affected, so read that section carefully before you commit.
The restrictions are deliberate. Lesson 3.3, "Balance transfers: a cheap bridge with a fee and a deadline", showed a balance transfer failing because new card spending built up behind it. The DCP rules close off that failure. If you expect to keep using cards as you do now, you will end up paying the consolidation loan and a new card balance at the same time.
Say Kumar consolidates the full S$30,000 over five years at an example EIR of 8%. His single payment would be about S$608 a month. That is lower than the S$615 he currently pays in interest alone each month. Over the five years, or 60 months, he repays the full S$30,000, and the total interest comes to about S$6,498.
At the same 8% example rate over seven years, his payment drops to about S$468 a month, but total interest rises to about S$9,277. A longer term gives you a smaller monthly payment and a larger total cost, so look at the instalment and the total together when you choose a term.
Before you agree to any offer, set it beside your current debts and check these points:
Compare the DCP's EIR with the rates you are paying now. Compare the DCP term with how long your current repayment path would take. Look at the total amount you would repay. Compare the single monthly payment with what you pay out each month now. Compare the total interest with what your current path is on course to cost.
Kumar's figures are an illustration. A real offer depends on your income, your debts and the bank, and the rate and term are fixed only after you apply. You may be turned down, and a DCP is not always the cheapest option. If you have several high-rate revolving debts and your income can cover one fixed instalment, a DCP is often worth serious consideration.
Kumar's next step is to check whether he is eligible and what his monthly payment might be. Yours is the same. Look up the current Debt Consolidation Plan criteria on the Association of Banks in Singapore website or a participating bank's site, and put them beside your own income and your list of debts. Then estimate your single monthly payment using the PMT function from lesson 2.4.
Find the current Debt Consolidation Plan criteria, then write down whether you would qualify and roughly what your one monthly payment would be.
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