In an article some time ago, we talked about how you can clear your debts effectively, we covered questions such as “do I clear my debts starting from the smallest or largest debt” by providing a step by step process as well as identifying the pros and cons of each method but before you do that, how do you know if your debt is good or bad?
Good Debt vs Bad Debt
If you are just starting out your financial journey or your first time learning about debt, you may be surprised that not all debt is bad but how can you tell the difference between good debt and bad debt?
Basically, good debt is anything that increases your future value or net worth. Debt such as taking out a mortgage or taking a loan for education is considered good debt, this is because although it may cost you money now, it will benefit you in the long run.
Bad debt is the complete opposite of good debt, it is something that decreases in value after it has been bought. Debts such as credit card and automobile loans will not increase your financial value in the future and your aim is to clear your bad debts first.
Fortunately for you, there are a few plans available out there to help when you find yourself in bad debt!
|Debt Consolidation Plan||Debts are paid off in monthly payments|
Lower interest rate with the right plan
|Using of credit cards will cause even larger debts
Not sticking to payment plan would cause financial burden
|Debt Management Program||Realistic monthly budget with financial goal to pay off debt|
Timely payments will improve credit score
|Some creditors may not be involved in this program|
|Debt Repayment Schemes||Final option for those approaching bankruptcy||Unable to apply on your own, only the court can refer.
Scheme is not free
Debt Consolidation Plan
Just as the name says, it is a plan that consolidates your debts across all financial institutions and puts it into 1 institution which helps to reduce your monthly debt repayment obligations. These 14 financial institutions which you can apply from such as Citibank, UOB and HSBC aim to help borrowers cope with the drop in the industry-wide borrowing limit.
To be eligible for DCP, you will have to:
- Be a Singaporean Citizen or Permanent Resident
- Earn between $20,000 and $120,000
- Have interest-bearing unsecured debt on all credit cards exceeding 12 times of your monthly income
Not everyone is eligible for DCP, approach any of the 14 participating financial institutions or check out The Association of Banks in Singapore to find out more.
Debt Management Program
This aims to help anyone that wants to avoid bankruptcy by allowing them to pay their debts off through monthly installments based on your servicing capability with the expectation to make prompt, full and regular payments.
Unlike DCP, DMP would not consolidate debts into one financial institution. Instead, they will work with you on your budget and what needs to be set aside for your daily expenses.
Debt Repayment Schemes
A pre-bankruptcy scheme that aims to have a win-win situation for both debtors and creditors. You will be required to repay your debts within the stipulated 5 years and will be released once the financial obligations under DRS have been met.
When you have unsecured debts not exceeding $100,000, you may be referred to the Insolvency Office for the Official Assignee (OA) to look further into your eligibility.
Before using such such schemes available to help you get out of debt, identify which are your good debts and your bad debts. Once that is done check your eligibility with your financial institutions.