According to Credit Bureau Singapore (CBS), 101,493 credit card users were in debt at the end of 2015, not paying any amount towards their bills or paying less than the minimum repayment required. The biggest debt for a single person was S$1,552,000. For a country of just over 5.6 million people, this is a huge number. Though the numbers on our island are less worrisome than in some other developed countries such as the United States, these statistics are just the tip of the iceberg in the credit card debt problem of Singapore.
Getting into Credit Card Debt:
Let’s first discuss how you end up accumulating credit card debt:
- Reckless spending: This is a no-brainer. If you are spending beyond your means every month, then you will obviously end up with a credit card bill that keeps increasing every month.
- Paying just the minimum amount due every month: Let’s say you have a credit card bill of S$2,300 to start with, and spend around the same every month, but pay only the minimum amount needed (around 6% of the total amount). The principal amount alone would be S$27,600 at the end of the year, on which you would have paid just around S$1,660, making the outstanding balance at the end of the year S$25,940. If you keep making only the minimum payment, you’ll take around 12 years to repay the amount, and you’ll accumulate an interest of around S$19,307 at the rate of 25% per annum. Do you see how crazy this is? By paying just the minimum amount due, you’re not only prolonging your indebtedness but also adding to it in the form of interest.
- Defaulting on payments: While there are people who pay just the minimum amount needed, there are also people who don’t pay anything at all. These are called defaulters. When you default on a payment, you attract not only interest rate penalties, but also a late payment fee of around S$60 to S$80 on every bill that payment that is delayed or not made. If paying just the minimum amount can incur heavy charges as delineated in the example above, you can imagine what will happen to defaulted payments. You will end up with a frozen card account and perpetually mounting credit card bill.
Read on: Common mistakes leading to heavy Credit Card Debt
Results of unpaid credit card bills:
Once you understand how you end up in an endless credit card debt cycle, you need to know what happens if you don’t pay off your credit card bills. Here are some results of increasing credit card debt:
- Late payment fees: Banks in Singapore charge around S$60 to S$80 as late payment fee every month if you delay your bill payments or do not pay anything. If you don’t pay for a year, this amount will rise to S$720 to S$960. This figure will also be added to your outstanding amount and interest will be charged on it.
- Penal interest rate: Most banks penalise you for more than 3 payment defaults – some banks don’t forgive even 1 default – by charging you an extra interest on the pending amount. This extra interest rate, known as penal interest rate, is generally 3% higher than your card’s normal interest rate. We don’t need to remind you again about how much debt pile-up a higher interest rate would cause.
- Low credit score: Each default, once reported to the credit bureau, will bring your credit score down slowly. Constant payments of minimum amount due also impact the credit score negatively. A credit report generally mentions payments made in the last 12 months, outstanding balances, the number and details of debt defaults, and loan account history with the date of opening and closure. All this is factored in when your score is calculated. The more the number of defaults against your name, the lower the score would be. A low credit score will render you unpalatable to lenders and you’ll have a tough time getting a loan in the future. If the status of your default records is ‘Negotiated Settlement’ or ‘Full Settlement’, it will remain on the credit report for 3 years from the final status change. However, if your account status is ‘Outstanding’, ‘Partial payment’ or ‘Sold off’, the records will be on the report indefinitely.
- Debt settlement: If you continue defaulting for 3 months or more, the bank will know that you do not have the means to pay your bill. In this case, and especially if your credit behavior in the past has been good, the bank might offer to settle your debts. This settlement could be a full settlement (where you manage to pay the bank in full and close the credit card account thereafter), partial settlement (where you pay an agreed amount to your bank but your account is not closed), or negotiated settlement (where you and the bank arrive at an amount to be paid, and the bank will close your account). The bank could also sell off your loan to someone else, thereby transferring your liabilities to a private lender who may not be very forgiving.
- Legal action and bankruptcy: If debt settlement does not work, the bank may take you to court. Once you are sued, you could be forced to liquidate your assets or declare yourself bankrupt. If you are liquidating assets, you might end up selling the property for far less than their actual worth. If you declare yourself bankrupt or the court declares you bankrupt, it’ll cause a huge dent in your credit score and you will not be able to borrow any money from any source for a long time.
As you see, not paying your credit card bills leads to far-reaching consequences that may damage your reputation and creditworthiness permanently. You need to find ways to budget yourself strictly, prioritise your debts and start repaying them as soon as possible. If you think you need help, Singapore has excellent credit counselling services and, and you can also join a debt management programme.