Skipping credit card payments may happen to everyone. During financial challenges like job loss or huge emergency expense, many individuals may face this situation. If someone cannot pay off their credit card in full, it may become increasingly challenging.
Understanding that letting a credit card debt go unpaid might result in interest and fees is crucial. Since yearly interest rates are usually about 25%, not paying off the amount owed on time might significantly inflate your debt.
As long as you continue to carry outstanding credit card debt, you run the risk of falling into a debt trap, which is a scenario that is worrisome. On the other hand, you may find a solution to any problem. We have some tips for you to consider in order to settle your credit card debt if you are having difficulty doing so.
How Credit Card Works?
Understanding credit cards’ operation is necessary to handle payment issues. Essentially, a credit card serves as a tool to assist with purchases, bill payments, and, more recently, cash withdrawals.
It is a form of short-term loan extended by the credit card company. You are granted a specific limit for covering bills and conducting purchases.
Processing Transactions with Credit Cards
As you make purchases, the available credit or balance on the card diminishes, and it becomes necessary to reimburse the spent amount.
When using a credit card, transaction details are captured by an authorised bank, commonly known as a merchant’s bank, for processing. If the credit card company approves the transaction, transaction is completed, and the corresponding amount is subtracted from the card.
At the end of the billing cycle, the credit card firm sends the cardholder a statement with all transactions. This statement shows the balance and payment amount. Remember that loan repayment has short grace period during which no interest is charged if paid within this timeframe.
However, maintaining unpaid balances on the credit card from month to month poses the risk of incurring additional charges in the form of interest. The card is subject to an Annual Percentage Rate (APR), reflecting the yearly cost of carrying a balance. The APR encompasses interest on the loan and supplementary expenses like annual charges.
It’s noteworthy that many credit cards feature a variable APR tied to the prime rate, potentially leading to additional charges over time. Consequently, a credit card holder may incur overtime fees if the balance is not promptly settled.
Importance Consideration Regarding Full Settlements on Credit Cards
As previously emphasised, credit cards are not intended for prolonged loans. Hence, it is advisable to explore alternative avenues for substantial expenditures, such as opting for personal loans or renovation loans for handling larger sums. These larger loans typically carry lower interest rates and provide the flexibility of repayment in installments, mitigating the impact on your financial situation.
Credit cards should primarily be viewed as a means of payment, facilitating purchases with the added benefit of discounts and rewards. Even within this context, it remains imperative to ensure that the credit card balance is fully settled each month. Now, let’s examine the flip side: what options are available when you encounter challenges repaying the credit card bill? Here are the primary considerations.
Check If You Can Meet the Minimum Payment Requirement
Should paying the full amount pose a challenge, credit card companies typically mandate a minimum payment that must be met monthly. Failing to meet this minimum can swiftly lead to adverse consequences. Late payment fees will be imposed, and your credit score may suffer, posing a potential threat to your future ability to secure loans from financial institutions.
In Singapore, most credit card issuers stipulate a minimum payment of 3% of the outstanding amount or S$50, whichever is higher. If settling the entire balance is not feasible, ensure you at least fulfill the minimum payment requirement.
Failure to meet the minimum payment may result in additional charges, with late payment fees reaching up to S$100 per month.
If meeting even the minimum payment proves challenging, it is crucial to proactively communicate with your bank. Engaging in a conversation with the lender may lead to the possibility of establishing an alternative payment date that better aligns with your financial circumstances.
Initiate a Balance Transfer Promptly
Acting in a timely manner, balance transfers can prove instrumental in settling credit card bills with remarkably low-interest rates, sometimes as minimal as 0%.
To illustrate, imagine you carry a debt of S$6,000 on a credit card, and meeting the full payment has become a challenge. Further, you anticipate that clearing the S$6,000 may take around five months.
Rather than allowing your credit card balance to rapidly escalate and become unmanageable, consider transferring it to an account offering a zero-interest balance option.
Despite retaining the S$6,000 balance, opting for a zero-interest balance transfer affords you an extended period, typically spanning 6-12 months, to repay the loan without incurring additional interest.
It is crucial, however, to prioritise repaying the loan before resuming use of the card for additional purchases if you choose this method. For instance, if financial constraints hindered your ability to repay the loan, reassessing your budget and trimming non-essential expenses can be beneficial.
Consider practical adjustments such as carpooling with your spouse for commuting instead of maintaining two vehicles or opting for packed lunches from home rather than dining out.
Opt for a Low-Interest Personal Loan to Settle Credit Card Debt
If utilising a balance transfer proves challenging, seeking an alternative solution becomes imperative. A viable option in such circumstances is opting for a personal loan, offering the advantage of flexibility in fund utilisation.
Directing the funds from a personal loan towards clearing your credit card debt is a strategic move. In Singapore, personal loans typically carry interest rates around 7% per annum, a significantly lower figure compared to credit cards that can accrue rates of up to 25% per year. Moreover, securing a personal loan from lenders with special offers may even yield the possibility of enjoying lower interest rates, including periods of 0% rates for a limited duration.
Upon taking a personal loan in Singapore to settle credit card dues, it’s crucial to recognise that the new credit arrangement will necessitate regular monthly payments until fully cleared. Furthermore, you have the flexibility to extend the repayment duration, spreading the payments over an extended period to maintain a manageable monthly commitment and alleviate pressure on your monthly income.
It’s important to bear in mind that once the tenure of the personal loan is fixed, attempting to settle the payment earlier may incur a prepayment charge. Given that personal loan interest rates can vary among different lenders, it is prudent to select the one offering the most favorable terms. An effective strategy for securing a low-interest personal loan in Singapore involves leveraging the services of MoneyIQ, loan-matching platform site. Not only do they simplify the process of comparing various personal loans, but they also play a crucial role in safeguarding against potential risks associated with unscrupulous lenders.
Opt for a Debt Consolidation Plan in Singapore
When your overall debt, including credit card loans, reaches 12 times or more of your monthly income, it becomes crucial to address it promptly.
Prolonging the resolution may lead to the accumulation of additional charges and penalties, making repayment increasingly challenging and potentially risking bankruptcy—an adverse outcome for your financial well-being.
To navigate out of this situation, a viable solution is a debt consolidation plan.
Debt consolidation involves consolidating all existing loans into a single loan. Essentially, you acquire a new loan to settle outstanding debts, leaving you with only the consolidated debt in Singapore. It’s important to note that debt consolidation specifically applies to unsecured credit, encompassing personal loans, renovation loans, and credit card loans. Here’s an illustration of how a debt consolidation loan operates.
For instance, if your monthly income is S$4,000 and you owe S$10,000 on one credit card, S$10,000 on the second, and S$20,000 on the third, the total debt amounts to S$40,000. While most lenders might approve a personal loan amounting to six times your monthly income (approximately S$24,000), this may not be sufficient to clear the entire debt. However, a debt consolidation loan can be approved to settle the full outstanding amount.
Debt consolidation loans in Singapore typically offer lower interest rates and extended repayment periods. This not only translates to savings on interest but also presents an opportunity to enhance your credit score. It’s important to adjust your budget as taking on further credit is restricted until the consolidated debt is brought to manageable levels—typically less than eight times your monthly income in Singapore.
Refrain from Acquiring New Credit until Debt is Settled
When faced with debt, the initial and crucial step is to abstain from accumulating additional financial obligations. While the aforementioned strategies are designed to assist in clearing outstanding balances on credit cards, achieving this goal becomes challenging if new debts continue to accrue.
A practical approach is to safeguard against further debt by securing your card in a drawer and only accessing it once the existing balance is fully settled. This precautionary measure ensures focused efforts on debt resolution without the interference of additional financial commitments.
Read also: How to Get a Debt Consolidation Loan with Fair Credit in Singapore
Need a Short-Term Personal Loan?
Effectively managing credit card debts and other loans requires a strategy and disciplined finances. Keeping high-interest loans like credit cards low is especially important.
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