Do's and don'ts of a Debt Consolidation Plan

Observe these do’s and don’ts when using a Debt Consolidation Plan (DCP) to manage overwhelming credit card debt.

When debt coming from multiple credit cards becomes too much to handle, a Debt Consolidation Plan (DCP) can help rebuild your financial life.

We’ve explained how a DCP works in Singapore. In a nutshell, it combines all your existing unsecured debt into a single loan with a potentially lower interest rate.

A DCP has a fixed term and monthly payments that go towards paying off your total unsecured debt. If used properly, this should eliminate your debt efficiently and can even save you money on interest payments.

However, like any other financial product, using a DCP requires discipline and a serious commitment towards paying off your debt. Before applying for a DCP, be aware of what you should and shouldn’t do when your plan starts.

Do shop around for the lowest interest rate

There are 14 financial institutions that offer a DCP in Singapore. Before applying for one, take the time to compare interest rates and find a plan with the lowest one. In general, the longer the loan tenure, the more interest you will pay over the lifetime of the loan. You’ll want to make sure that you’re getting the lowest rate possible.

Some DCPs are bundled with welcome offers such as promotional interest rates, complimentary insurance, and other features that will help you save money. While you shouldn’t choose a financial product for the welcome gifts alone, these money-saving extras make it easier to decide between two equally promising DCPs.

Currently, DBS and POSB’s DCPs offer one of the lowest interest rates in the market, at 3.58 per cent p.a. (EIR from 8.22 per cent p.a.) and a loan tenure of up to 8 years. This allows you to consolidate all your credit cards and unsecured loan balances while enjoying attractive benefits such as receiving 3 per cent cashback when you refinance your loan.

Keep in mind that the interest rate offered to you is based on your personal credit profile and may differ from the published rate. 

Don't miss a payment

Use a DCP calculator to get an idea of how much your monthly payments will cost, then create a budget around this. Once your plan starts, your monthly payment needs to be made in full and on time – no questions asked.

If you miss a payment, you’ll get charged interest and a late fee as determined by the financial institution.

ALSO READ: What is a debt consolidation plan and how does it work in Singapore?

This is not too different from what happens when you can’t pay your credit card bill on time. Only this time, the consequences are more dire; there are no financial products that can help you in case you default on your DCP.

Therefore, develop the discipline and habit of paying your DCP on time.

Don't use the credit facility  

As soon as your DCP gets approved, you won’t be able to use your existing credit cards, personal loans, and other unsecured credit facilities. However, DCPs come bundled with a revolving credit facility (i.e. a credit card) that has a fixed credit limit of 1x your monthly income. This is to provide you with a mode of payment in case you need help covering your daily expenses or if you run into an emergency.

Because it’s part of the DCP, the credit facility cannot be cancelled and you cannot lower the credit limit. Additionally, you have to bear any fees and interest rates that come with the credit facility.

It’s important to remember that you are not required to use the credit facility. In fact, we’d go so far as to advise you to lock it up and throw away the key. Alternatively, hand over the credit facility to someone who can protect it for you.

Using the credit facility undoes all the hard work you’ve put into repaying your credit card debt and puts you in a financial hole twice as deep. If you use the credit card and are already spending several hundred dollars a month repaying your DCP, there is a good chance you will be unable to pay back the bill in full and on time.

And just like your old credit cards, this credit facility comes with late fees and high interest rates that you need to pay in case you miss the due date.

Stay out of the never-ending debt cycle by continuing to save money even if you have credit card debt. Even an amount as low as $100 can go a long way into building an emergency fund you can turn to in case something goes wrong.

Do change your spending habits

A DCP simplifies the way you pay off multiple credit cards balances and takes the stress out of juggling several bills and due dates. However, this is only one part of the solution. In order to maintain your debt-free status, your behaviour needs to change.

Start with these easy money habits you can set in minutes and follow our tips to setting financial resolutions that will actually work for you.

Find ways to decrease your spending and consider taking up gigs on the side to supplement your income or boost your savings. Being on a DCP is also a great opportunity to master these simple habits that are necessary to owning a credit card.

A DCP will not magically solve your financial woes. Unless you learn to implement a budget and use credit responsibly, you’ll stay stuck in the same financial pit you were in before.

This article was first published in SingSaver.com.sg.