Apart from mortgages, the most common source of debt for Singaporeans are credit cards. This is both good and bad news for those of us dealing with debt.

When used responsibly, credit cards are convenient and rewarding. However, because they are so easy to use, we can end up relying on them well beyond the point when it’s safe to do so.

The good news is, it’s entirely possible to choose to stop using credit cards temporarily, thereby stopping us from taking on more debt.

Because cards nowadays come with electronic chips installed, we don’t recommend the old standard of freezing your cards in a cup of water to prevent further use.

Instead, put all your credit cards into a sturdy lockbox, lock it up and keep it somewhere secure. Hand the lockbox key over to someone you trust, and only let them give you the key back when you are in the clear.

Don’t forget to login to your shopping websites and apps and remove your saved credit card information. This is especially important if you use services like Uber or Grab that essentially remove the payment process from the service.

The next thing you need to do is to check all your credit card bills for 3 pieces of information, which you will compile in a simple spreadsheet.

For each source of debt, list down: the amount owing, the interest rate, and the minimum payment required per month. Then, arrange your list of debts according to interest rates.

If you have multiple debts with similar interest rates, prioritise the one with the lower amount owing.

Do note that if you drew a cash advance, the interest on that amount will be higher than your base credit card rate. Hence, if one of your cards has a substantial balance that is mostly from cash advances, put that on the top of your list.

At this point, you should also go ahead and tally up how much you owe in total, across all your debts. Try not to be too shocked by the final amount; the point is to know how financially extended you are.

Next, you want to find out how much you can reliably pay towards your debts on a monthly basis.

Do up a simple financial statement where you compare your income against your expenses. Be as detailed as possible when doing this, because the point is to have a clear look at where your money is going.

Total up all your bills, including installment payments, if any. For credit cards, total up the minimum payment sum for each (from Step 2 above) and add it to your final expenses tally.

Go through your list of expenses and see where you can make reductions. Once you’ve trimmed down your expenses as much as possible, compare it against your income to see how much surplus you have each month.

From this surplus, you should set aside 30% to 50% as savings. The remaining amount (let’s call it the Monthly Debt Payment) is what you will use to pay off debt.

Illustration:
Income: S$3,500
Expenses (including credit card minimum monthly payments): S$2,900
Surplus: S$600
Savings (50% of Surplus): S$300
Monthly Debt Payment: S$300

If you find that your surplus is not large enough for you to meaningfully save and pay off your debts at the same time – or worse, is negative – it’s time to increase your income.

Once you have a clear picture of your debts the next step is to reduce the interest rate. The way to do this is by using a Balance Transfer.

Think of a Balance Transfer as a loan with a fixed interest-free repayment period. This gives you savings on interest payments, which effectively lowers your interest rates.

This feature is immensely useful in paying off your credit card debts, as the compounding interest is what makes it difficult to repay them.

Do note that Balance Transfers come with an admin fee, which you’ll pay upfront.

How much you can get from a Balance Transfer is determined by your existing credit limits. If you have maxed out your credit cards, you may not qualify for one.

If you qualify, get a balance transfer for as long a tenor as possible. The longer interest-free period you get, the lower your overall interest will be.

Take a look at your credit card balances and highlight the one with the highest interest rate. That’s your Target Debt, and that’s the one you’ll go after first.

Each month, pay the minimum monthly payment on that card, plus the Monthly Debt Payment towards your Target Debt. For the rest of the credit cards, pay only the minimum sum for now. You’ll get to them eventually.

Illustration: Monthly Payment Schedule
Monthly Debt Payment: S$300
Target Debt: Credit Card 1 (minimum monthly payment = S$150)

Credit Card 1: Pay minimum amount (S$150) + S$300
Credit Card 2: Pay only minimum amount
Credit Card 3: Pay ony minimum amount
Credit Card 4: Pay only minimum amount…

It is important that you cover the minimum monthly payments for all your outstanding cards, otherwise you will rack up late fees that can cost up to S$80 per month.

Keep this payment schedule until your Target Debt is cleared.

Once you’ve cleared your first Target Debt, your Monthly Debt Payment will increase. Why? Because you no longer have to pay the minimum monthly payment on the card you just paid off.

So, you’ll want to add this extra amount to your Monthly Debt Payment, and use it to go after the debt with the next highest interest rate.

Once you clear this second source of debt, increase your Monthly Debt Payment again, and go after the next debt on your list.

And that is the key to this method: because your Monthly Debt Payment increases with every card you clear, you’ll make faster and faster progress as you keep going.

Illustration:
After clearing Credit Card 1…
New Monthly Debt Payment: S$300 + S$150 = S$450

Credit Card 1: CLEARED, no further payments needed
Credit Card 2: Pay minimum amount + S$450 per month
Credit Card 3: Pay only minimum amount
Credit Card 4: Pay only minimum amount…

It can seem daunting as you embark on clearing your debt, especially when you see how much you owe at the beginning. That’s why this method breaks down your debt into manageable chunks which you will clear one at a time.

One important key to success is to celebrate your progress. Doing so will give you an important psychological boost that will reaffirm your ability to take control of your debts.  

Try this: once you clear your first credit card, use the minimum monthly payment from that card to buy yourself a reward. On the next month, add that minimum monthly payment to your Monthly Debt Payment, and keep going.

Repeat until you hit your next milestone (clearing your next card), allow yourself another reward, then keep going until you reach your final goal – S$0 balance in credit card bills.  

Text: Alevin Chan/SingSaver