3 Ways to Eliminate Your Credit Card Debt Now

Speaking about how smartphones have invaded our lives, Japanese author Haruki Murakami says, “Cell phones are so convenient that they’re an inconvenience.” The same principle could hold true for credit cards.

Singapore’s market is saturated with credit cards. According to statistics released by the Monetary Authority of Singapore, there were over 7.7 million credit and charge cards in use in the country in June 2017. Additionally, there were another 1.4 million supplementary cards provided as add-ons to the spouse or family members of the main cardholders. That’s a total of 9.1 million cards in a country with a population of about 5.6 million.

While credit cards offer great convenience and provide users with benefits in the form of rewards points and cashback offers, they do suffer from one potential drawback. If you are not careful, it is very easy to get carried away and overspend when you have the option of using one of the several cards in your wallet.

A study conducted by Drazen Prelec, a professor of management science and economics in the MIT Sloan School of Management, found that people spend much more when they can pay by credit card.

A group of students was offered hard to obtain tickets to a popular football game. The students were divided into two groups and told that they would have to bid for the tickets. One group could pay only with cash while the other could pay only with credit cards.

The results of the study surprised the researchers. The average amount that was bid by the students who could use credit cards was twice as much as the amount that the cash buyers were willing to pay.

This psychological quirk leads many Singaporeans to fall into the trap of spending more than they can afford. Credit cards offer the facility of rolling over a major portion of your monthly bill. You can get away with paying only 5% of the amount that you spend. The rest will be billed to you again next month along with interest that could be as high as 2% per month or even a little more.

Large numbers of Singaporeans use the rollover facility. At the end of June 2017, a total of S$4.5 billion was outstanding to the country’s banks on this account.

Unfortunately, many people find that they are unable to honour their repayment commitments. They fall into a debt trap from which they cannot extricate themselves.

What should you do if you find yourself in this position?

 

Stop using your credit cards

Source: Shutterstock

When you leave home, remember that you should not carry your cards. This will prevent you from making purchases on impulse. If your wallet contains only a limited amount of cash, it is unlikely that you will give in to the temptation of overspending.

There is one more reason that you should not use your cards if you carry a rollover balance. Any amount that you spend will attract interest from the day that you make your purchase. Your card does not provide you a free credit period any longer.

By continuing to use your card when you are paying only the minimum amount every month, you will accumulate additional interest. You should do your best to avoid this.

 

Don’t pay only your minimum balance

If you have accumulated a large unpaid balance on your credit card, remember that the interest is accumulating at a rate of 24% per year. Paying only 3% or 5% of the amount appearing on your monthly credit card statement can keep you in debt for years.

An interesting analysis by MoneySENSE reveals the number of years that you would take to pay off your accumulated credit card debt if you pay only the minimum amount every month. The calculation assumes that the minimum amount due is 5% of the billed amount and that the cardholder has stopped using the card.

 

Amount owed to the card issuer	Number of years that it will take to pay off the amount	Total interest paid at 24% per year
S$3,000	5.2	S$1,623
S$5,000	6.6	S$2,957
S$10,000	8.5	S$6,290
S$50,000	13	S$32,956

 

If you don’t want to remain in debt for years, you must use your surplus funds to pay off your credit card dues. These payments should get priority because for most people this debt is the most expensive that they are carrying.

 

Use balance transfers wisely

Several card issuers offer you an “interest-free” period if you transfer your unpaid credit card outstanding amount to them. Why should they do this? Every bank wants to increase the volume of its business and it is simply a marketing technique to attract new customers.

You should also note that the balance transfer facility is not really interest-free. You would be required to pay a service charge to use this facility. For example, Citibank charges a fee of 1.58% of the transferred amount. Under the terms of this facility, you would need to pay off within either three months or six months.

The service fee of 1.58% results in an effective interest rate of 6.69% per year for three months and an effective interest rate of 3.6% for six months. This is significantly lower than the rate you would be paying to your original card issuer.

However, before using this facility you should be sure that you would be in a position to pay the transferred amount within the specified grace period. If you are unable to do this, your rate of interest would revert to the bank’s regular rate.

 

Create a budget that you can stay with

If you have accumulated thousands of dollars in credit card debt, it will take you some time to get your finances back in order. Don’t expect this to happen overnight.

One important step that you must take is to create a budget for yourself. Allocate the maximum sum possible to card repayments. If you have amounts outstanding on multiple cards, pay off the card with the highest interest rate first. This will help to minimise your interest burden.

Try and recollect what got you into credit card debt in the first place. Be careful that you do not to repeat that behaviour. Otherwise, you will be back where you started with a huge pile of debt that you will find difficult to pay off.

(By Ravinder Kapur)

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