SAGE Talk: Debt Avoidance

Reminiscences of CCS first Chairman. This is the ninth of a series of articles by Mr Kuo How Nam (founding member and former Chairman of Credit Counselling Singapore). How Nam’s articles are scheduled to be published on first Fridays of the month.

While people will proudly show off their surgical scars from their surgical procedures and gossip about problems with other people, when it comes to financial matters, confidentiality is the byword. 

Working children will not tell their parents or sometimes even their spouses what they earn.  When it comes to debts, it is even worse.  There is no shame in admitting to taking up loans to buy a home or a car.  But when it comes to credit card debts, ie over consumption, people tend not to say anything.  Somehow credit card debts are synonymous with irresponsible spending and financial mismanagement, something to be kept a dark secret. 

In our experience, there are many causes for credit card debt and over-spending is but one of the many causes.  In many situations, we have a combination of factors, some avoidable and self-created and some due to bad luck.  We will be discussing these in greater detail in later articles.

In my opinion, the biggest cause for debt distress is avoidance of the problem.  No matter what the originating causes, ignoring or avoiding the debt will cause the problem to escalate to the point where solutions are difficult as the number of creditors and the size of the debt increase.

One must realise that the interest rate on credit card debt is as high as 28% per annum.  This rate is applied monthly ie interest is calculated on the outstanding during the month and added to the month end debt.  The effective rate of interest is over 30%, a very high rate of compounded interest.

If there is a delay in payment, then late payment charges and other fees will apply which adds on more to the amount owing.

The minimum monthly payment is usually calculated at 3% of the outstanding balance and in effect very little principal is made since the monthly payment is mostly interest.  

So we have many people who start off with some debt but they avoid the problem and their financial situation becomes worse.  They will borrow more using other credit cards or expensive sources of credit like money lenders or worse from loan sharks.  Interest gets compounded, the debts multiply and soon the debtor finds himself in an impossible position.

If the person had confronted his debts early, debt restructuring solutions are simpler since the debts are smaller and there will be less creditors to contend with. 

We have many cases where individuals have sought assistance with astonishing big debts, most of which are due to interest accumulated over just a few years.  It is not unusual to find that the accumulated interest and charges can add up to more than 60% of the total outstanding.

Our advice to debtors is to tackle the problem early.  Avoid late payment charges and fees which can be very heavy.  Do not borrow more to buy time.  Face up to the situation and seek help early.  You only make things worse by delaying as it will be that much harder to find a solution. 

If you are facing a debt issue and would like to seek assistance from CCS, attend our weekly Debt Management talks (conducted both over Zoom and in-person at our office), where you will learn more about what to do, when and how to communicate with creditors, what are the common collection actions creditors can take, what are the various debt settlement options are and what is the CCS Debt Management Programme. Click here for schedule.

After attending the talk, you can submit a request for one-to-one credit counselling. Details on the counselling session and instructions on how to arrange for an appointment will be explained during the talk.

CCS also conduct monthly Facebook Live webinars on topics such as prudent financial management and responsible use of credit. Follow CCS Facebook page to stay updated of our webinars and events.

This article was contributed by Kuo How Nam.

Published 3 March 2023.

The opinions expressed in this article are those of the author, and do not necessarily represent the views of Credit Counselling Singapore. The content on this website is for general information only. It is not intended to constitute or be relied upon as financial or credit advice. You should consult a qualified financial consultant if you require financial advice.