Today, missing credit card payments can happen to any of us. For most people, this can be caused by a period of financial challenge, such as a large emergency expense and job loss, among other reasons. When you are unable to pay the credit card balance in its entirety, the truth is that that marks the start of even worse things.
One thing that you need to know about is that if the credit card balance is left unpaid for longer, it will keep accumulating interest and fees. With the interest rates averaging about 25% per year, failing to repay the balance can easily blast your debt through the roof. This is scary, right? However, we have some ways that you can use to try and keep the damage from high-interest rates as low as possible.
Keep reading as we reveal some professional steps that you can use to save yourself from incurring more debts from the credit card bills.
How Do Credit Cards Work?
Before we can look at what you can do when you can't pay, let's start by understanding how credit cards work. A credit card is a card designed to help you with purchases, paying bills, and now, withdrawing cash. Think of the card as a type of short-term loan, which the credit card company advances to you. You are given a limit of the amount of money to use for paying bills and making purchases.
Transaction Processing with Credit Cards
The available credit or balance on the card keeps reducing as you spend, and you are required to pay back the money. When you use a credit card, the details are picked by an authorised bank, commonly referred to as merchant’s bank, to process the transaction. If the credit card company approves the transaction, it is completed and the amount deducted from the card.
When a billing cycle is over, usually one month, the credit card company sends the cardholder a statement with all the transactions. The statement also shows the balance and the amount that you are required to pay. Note that you are given a small grace period for repaying the loan, and no interest is charged if payment is made during this time.
If you hold a balance on the credit card month to month, there is a risk of an additional charge levied on the interest. Your card is charged on an annual percentage rate, which reflects the cost of holding the balance on a yearly basis. The APR includes the interest on the loan and additional costs, such as annual charges.
We must also indicate that most credit cards come with variable APR, which is linked to the prime rate. So, your credit card can also attract an overtime charge.
Difference between Credit Cards and Debit Cards
What is the difference between credit cards and debit cards? A credit card is linked to the credit card company's bank accounts, while a debit card is linked to the holder's checking account. Because the debit cards are directly linked to your bank account, they do not impact your credit score since you are simply using your own money held in the account and not credit.
However, a credit card directly impacts your score and the Credit Bureau Singapore (CBS) uses it, alongside other pieces of your financial information, such as payment history and credit mix to calculate your score. Then, the information is used to calculate your credit score. So, when you cannot pay the credit card bill, your score will be pushed down.
A Vital Note about Full Repayments on Credit Cards
As we highlighted earlier, credit cards are not designed for long-term loans. Therefore, it will be a great idea to look for alternatives for major spending, such as personal loans or renovation loans to deal with large sums. These bigger loans come with lower interest rates and allow you to repay in instalments so that there is minimal impact on your finances.
Credit cards should be considered as a mode of payment, helping you to buy things for discounts and rewards. Even with this consideration, it is paramount to ensure the credit card balance is paid in full every month. Now, let’s flip the coin: what happens when you cannot repay the credit card bill? Here are the main options.
Establish If You can Make Minimum Payment
If it is becoming a challenge to pay the entire amount, credit card companies have an established minimum that must be repaid every month. If you do not pay this minimum, things can get a lot worse within a very short moment. For example, you will be slapped with additional fees for late payments, and your credit score will get damaged. A bad score is very dangerous because it could compromise your ability to get loans from financial organisations in the future.
Most credit card companies in Singapore require credit cardholders to pay 3% of the card's outstanding amount or S$50, whichever is higher. So, if you are unable to clear the entire amount, make sure to clear the minimum pay. If the minimum payment is not met, you will be charged up to S$100/month for late payment.
If paying the minimum payment is still challenging, it will be crucial to talk to your bank in advance. The lender might be willing to set an alternative date for payments.
Make a Balance Transfer the Soonest Possible
When done on time, bank transfers can help to clear the credit card bill with very low-interest rates, at times as low as 0%. Let's demonstrate this with an example. Suppose you have S$6,000 debt on a credit card and it has become challenging to pay the total amount in full. Also, you estimate that it will take five months to clear the S$6,000.
Instead of letting your credit card bill rapidly spiral and get out of hand, it will be an excellent idea to shift it to a zero-interest balance type of account. Although you still have S$6,000, interest and the processing fee, shifting the credit account to a zero-interest balance allows you more time of 6-12 months to clear the loan without additional interest getting piled on top.
If you opt for this method, it is important to put focus on repaying the loan before starting to use the card for additional purchases. So, if you were unable to repay the loan because of shrinking income, consider re-looking at your budget and cutting on non-essential items. For example, you might want to use the same car with your spouse to and from work instead of two. What about carrying packed lunch from home instead of buying from a hotel?
Take a Low-Interest Personal Loan to Clear the Credit Card
If using balance transfer is challenging, you need to look for an alternative. One of the options that you can use is taking a personal loan because it does not come with limitations on how you can use the funds. Then, you can direct the money from the personal loan to settle the credit card debt. In Singapore, you will get most personal loans with interest rates of around 7% per year, which is way lower compared to credit cards that attract up to 25% per year. If you can get a personal loan from lenders with special offers, it might be possible to enjoy lower interest rates, even 0% rates, for a couple of months.
When you take a personal loan in Singapore to settle your credit card, it is important to note that the new credit will require regular monthly payment until it is cleared. Again, you can extend the payment over a long period to keep the monthly payment low and avoid pressure on your monthly income.
Always remember that once the personal loan tenure is fixed, trying to clear the payment earlier might attract a prepayment charge. Also, personal loans in Singapore attract different interest rates and you should consider only the one with the lowest. One of the best ways of netting a low-interest personal loan in Singapore is working with Lendela, a Lender comparison site. They not only make it easy for you to compare different personal loans but also come in handy to help reduce the risk of falling into the hands of loan sharks.
Go for Debt Consolidation Plan in Singapore
If your total debt, including the credit card loan, is 12 times or more your monthly income, it is paramount to look for a way to settle it as fast as possible. Taking any longer means that the debt is likely to continue accumulating, with some attracting penalties and ultimately making it very hard to pay. In the worst case, you might end up getting declared bankrupt, which is a very harmful tag to your financial health. So, the best way out of these debts is a debt consolidation plan.
Debt consolidation means that you are wrapping all other loans into a single loan. You simply take another loan to clear the outstanding loans, meaning that you are only left with the debt consolidation loan in Singapore. It is important to also appreciate that debt consolidation only covers unsecured credit, such as personal loans, renovation loans, and credit card loans. Here is an example of how a debt consolidation loan works.
If you have a monthly salary of S$4,000 and owe S$10,000 on one credit card, S$10,000 on the second credit card, and S$20,000 on the third credit card, that creates a total of S$40,000 that needs to be cleared. If you opt for a personal loan, most lenders will only approve an amount six times your monthly income, translating to about S$24,000. This might not be enough to clear the debt. However, a debt consolidation loan can be approved to clear the entire debt.
The good thing with debt consolidation loans is that the interest rates are lower and you repay over a longer period. This will not only save you money on interest rates, but can also help you to improve your credit score. However, you will need to make adjustments to your budget because you will be disallowed to take further credit until the debt is pushed to manageable levels. In Singapore, the debt must go down to less than eight times your monthly income.
Avoid Taking New Credit before Clearing the Debt
Whenever you get yourself in debt, the first step is avoiding piling more debts. The strategies that we recommended above come in handy to help you clear the outstanding balances on the credit cards, but it might be hard to achieve the objective if the debt keeps piling. Consider locking the card in a drawer and only going for it once the balance is cleared.
Why You Should Use Lendela
The ability to manage the bills on your credit card and any other form of loan requires a good plan and discipline. It is also important to note high-interest debts, especially credit card debts, and always keep them as low as possible. To execute your plan well, you need to have a reliable way of making fast loan applications and comparison of different terms and conditions. This is where Lendela comes in.
With Lendela, applying for a loan is very easy because you do not have to go through dozens of loan application forms and rules. So, if you prefer to use a personal loan or debt consolidation loan to tackle the credit card debt, Lendela makes the process fast and convenient. So, how exactly does Lendela work?
All that you need to do is visit Lendela's website to submit a short application. Then, the application is sent to different lenders who respond by giving you their best possible pre-approved offers. At this point, you review the conditions of the pre-approved loans and pick the preferred choice. Finally, the loan is signed at the lender's office.
When it comes to credit card balance and debts, do not let them spiral out of control. The good thing is that the strategies we have listed in this post have been tested and you can count on them to finally wrestle down the bills. Once you are done, try as much as possible to ensure you are on top of your finances by only taking only the debt you can repay, savings for emergencies and growing revenue streams.