Pre-empting the pitfalls of debt

Credit Counselling Singapore chairman Kuo How Nam advises borrowers to seek help earlier when it is easier to restructure their debts.
Credit Counselling Singapore chairman Kuo How Nam advises borrowers to seek help earlier when it is easier to restructure their debts.

An upcoming credit limit ruling could provide help earlier for those in debt

The latest initiative by the authorities to help borrowers from falling into deep, unsecured debt is a reminder for all to exercise financial prudence. It is also timely, what with the year-end festivities and Chinese New Year round the corner.

The Sunday Times highlights what you need to know about the new credit limit measure.

WHAT IS THE CREDIT LIMIT MANAGEMENT MEASURE?

Come Jan 1, the so-called Credit Limit Management Measure kicks in. It is aimed at borrowers with unsecured debt, such as personal loans or credit card debt, that exceeds six times their monthly income.

Banks will not be allowed to grant any increase in credit limits or any new unsecured credit facilities to such a person if they cause his total credit limit to exceed 12 times his monthly income. Affected borrowers can continue to use their existing unsecured credit facilities.

To check your outstanding balances and credit limits with all the banks, you can buy a credit bureau report.

The Monetary Authority of Singapore and financial practitioners such as Mr Kuo How Nam, chairman of Credit Counselling Singapore (CCS), say this is a pre-emptive measure to aid borrowers and prevent more problems before they are affected by an industry-wide borrowing limit that is being phased in progressively.

In June 2015, an industry-wide limit was introduced that capped unsecured loans to 24 times one's monthly income. It was cut to 18 times in June this year and will be lowered to 12 times from June 2019.

WHAT ARE UNSECURED DEBTS?

Unsecured debts are those with no collateral, such as credit card debts, personal loans or an overdraft. This limit applies to interest-bearing balances on personal unsecured credit facilities. It excludes secured loans such as property and car loans, as well as unsecured loans for business, medical and education spending.

Borrowers with an annual income of at least $120,000 or those with net personal assets exceeding $2 million are exempted from the industry-wide borrowing limit.

HOW MANY BORROWERS ARE THERE WITH UNSECURED DEBTS?

Over the past few years, steps taken to manage borrowing have produced results. Currently, there are an estimated 60,000 borrowers with unsecured debts between six and 12 times their monthly incomes - about 4 per cent of the total 1.5 million unsecured credit users here.

In October this year, there were 26,000 borrowers with interest-bearing unsecured debts of more than 18 times their monthly incomes. Collectively, they owed $3.2 billion, which is less than 0.15 per cent of total banking assets. This is down from the 51,000 borrowers who had a similar debt threshold, owing an aggregate of $5.6 billion, in February 2015.

WHAT CAN THESE BORROWERS DO?

Mr Kuo advises borrowers to seek help earlier when it is easier to restructure their debts, instead of avoiding the problem until it is too late.

"People in debt are usually under pressure and constantly worried about their ability to meet the next monthly repayment. It will affect their work performance and spoil family relationships," he says.

Several assistance schemes and repayment plans, such as the Debt Consolidation Plan (DCP) launched earlier this year by the Association of Banks in Singapore, are available to help borrowers.

Under a DCP, multiple debts are consolidated into a single account so borrowers need to pay only a fixed monthly amount to one financial institution, making it easier for them to clear their debts.

The DCP's interest rates are lower than credit card and credit line rates. Compared with the different minimum payment amounts for credit cards and credit lines, the DCP's payment amount per month is fixed for an agreed period with the bank, says Ms Jacquelyn Tan, United Overseas Bank's head of personal financial services for Singapore.

"Borrowers who take up UOB's DCP are given a promotional interest rate of 4.99 per cent per annum till Dec 31 if they take up a 72-month tenor. This works out to an effective interest rate of 9.04 per cent per annum," she adds.

Without a DCP, a borrower is likely to pay an effective interest rate of over 20 per cent per annum.

The DCP is open to Singaporeans and permanent residents earning between $20,000 and $120,000 per annum with net personal assets of less than $2 million. Another condition is to have total interest-bearing unsecured debts on all credit cards and unsecured credit facilities with financial institutions here that exceed 12 times your monthly income.

Another avenue is CCS which offers free talks on debt management and advice on how to draw up and live within a budget. Where applicable, borrowers would be assisted in working out a monthly instalment debt repayment plan.

The number of people counselled at CCS grew from 1,839 in 2013 and 2,459 in 2014 to 4,677 in 2015. Last year, 3,756 people were counselled. This year, the number had already hit 3,791 by November.

A version of this article appeared in the print edition of The Sunday Times on December 24, 2017, with the headline 'Pre-empting the pitfalls of debt'. Print Edition | Subscribe