8 tips on how to avoid debt

1. SPEND WITHIN YOUR MEANS

The golden rule is to always spend within your means, says Mr Kuo How Nam, chairman of Credit Counselling Singapore.

"Based on what our clients tell us, the most common cause is overspending, that is, they have a lifestyle that is not commensurate with what they earn. Such people need to review their spending habits and be more realistic about what they can afford.

"There may be occasions where there are unexpected expenses and a mismatch between income and expenditure. But the deficit should be covered as promptly as possible and not become a permanent or regular feature," he adds.

2. LOOK AT TOTAL INDEBTEDNESS

Mr Kuo notes that people have a tendency to look at the monthly minimum payments and not their total indebtedness as a measure of affordability.

"This is self-deception and paying just the minimum monthly repayment will take a very long time to reduce debts as most of the payment comprises interest. It is very difficult to get out of credit card debt if they continue to spend and not pay down their debts," he says.

3. BORROW ONLY WHEN NECESSARY

Mrs Ong-Ang Ai Boon, director of the Association of Banks in Singapore, says it is important for consumers to borrow only when necessary.

Mr Anthony Seow, DBS Bank's head of cards and unsecured loans, says it is not advisable to borrow more even if you qualify for a larger amount.

"From time to time, we understand that some customers have financial needs and may need to obtain unsecured financing for many different reasons, such as unexpected medical bills, going on vacations, emergency home repairs or just extra cash to pay their bills. But whatever their reasons, we always advise our customers to be prudent and only borrow an amount they are comfortable repaying," he adds.

4. AVOID FUNDING LIFESTYLE WITH DEBTS

Many are overconfident and think they will always enjoy salary increases and bonus payments that will enable them to pay off their debts one day. When a person is in debt, they have fewer options and buffers available to them and are in a vulnerable position, adds Mr Kuo.

Mrs Ong-Ang's advice is to actively keep tabs on and pay down overall outstanding balances and debts.

5. REDUCE UNNECESSARY EXPENSES

With the uncertainties in the employment market, consumers could lose their source of income and accumulate debts over time. Hence, reducing unnecessary expenses by budgeting and distinguishing between needs and wants, is key to maintaining good financial health, says Mr Kenneth Tan, vice-president of group lifestyle and payment products at OCBC Bank.

6. TRANSFER SOME RISKS TO INSURANCE

A considerable number of people are facing financial difficulties because of extenuating family or medical circumstances. In most cases, planning ahead or having an insurance coverage plan may have helped these affected individuals tremendously, says Mr Tan.

7. MANAGE YOUR CREDIT SPEND

Ms Jacquelyn Tan, United Overseas Bank's head of personal financial services for Singapore, advises you to evaluate your spending habits and needs before applying for a credit card. This will help you choose a card that is most suitable for your lifestyle and help you stretch your dollar.

For example, if you are spending largely on groceries, you could consider cards that enable you to enjoy rebates for everyday spend. If you like to travel, look at cards with the best earn rates for frequent flyer miles.

Be comfortable with the terms and conditions of the card. Familiarise yourself with the interest rates, annual fees, late payment fees and other costs associated with the credit card before signing on the dotted line.

8. MAINTAIN A GOOD CREDIT HISTORY

To ensure a higher chance of qualifying for loans or obtaining credit, you can build up and maintain a good credit history by making sure that you pay all your bills on time.

If you have problems making even the payment for the minimum amount, inform your bank early so that you can work out a manageable repayment scheme. This signifies your commitment to repay. Furthermore, avoid going over the credit limit on your credit cards as this may reflect your inability to handle your finances properly, adds Mr Tan.

Mrs Ong-Ang reminds consumers to update their banks with their current income level so as not to be adversely affected by the borrowing limit.

Lorna Tan

A version of this article appeared in the print edition of The Sunday Times on December 24, 2017, with the headline '8 tips on how to avoid debt'. Print Edition | Subscribe