Young adults, aged 21 – 29, are becoming a problem demographic. Their credit card debt is accumulating faster than a clogged toilet at a bus interchange. If you’re in this age group, take a look around your classroom/office for a minute. 2 out of 5 of you might retire to a life of canned beans and instant noodles, living in an apartment from the set of a Pang Brothers horror flick – Now that’s scary! The statistics, we mean.
Most of this happens due to rollover debt – credit card bills left unpaid for more than 30 days. According to the Monetary Authority of Singapore (MAS), the nation’s total rollover debt in 2010 was $4 billion. The 21-29 age group also makes up 39% of frequent revolvers. That is, credit card holders who don’t pay their bills, and “roll over” the balance for the next three months.
You Have How Much Plastic?!
There are six million credit cards in circulation, but only about one million Singaporeans qualify for them. That works out to around five or six cards per person. It also explains how one million people can accumulate a total debt of $4 billion.
Just for the sake of comparison, carrying six credit cards when you can’t manage your spending is like trying to diet by working in a candy store. Some of us are more inclined to spend. It’s a psychological quirk. But the very least we can do is avoid temptation.
Credit cards use compound interest. That means that the interest rate is applied to the total outstanding amount each month. Here’s a drastically simplified example:
Let’s say I owe $1000, and my monthly compound interest rate is 10 percent.
At the end of the month, I don’t pay the $1000. Fine, now I owe $1,100. Next month, if I still don’t pay, I would owe $1,210. That’s because compound interest means I add 10 percent of $1,100, not 10 percent of the original $1000.
So the more money you owe, the faster your debt grows. And the faster your debt grows, well, the more money you owe. The only way out of this trap is to make sure your repayments exceed the compound interest. That invariably means, to the horror of many of you reading, paying more than the monthly minimum.
Otherwise, you’re just trying to put out a house fire with your window cleaner thingy.
On top of compound interest, some companies charge a further two percent to the amount owed. It might appear as an “administration fee”. This might be followed by late fees, transaction fees, and annual fees that all pile on, until you feel like the ball holder at a Rugby League final.
Frequent revolvers are those who tend to miss or forget about added fees. Probably because they’re so broke they can’t even pay attention.
The Billing Cycle:
Pop quiz: When does the compound interest get added to your outstanding balance?
At the “end of the month”? What day is that, exactly?
If you pay back the money, but you miss the window by a day or two, you still get slapped with the interest. What happens if your paycheck comes in on the 31st, and your credit card company applies the interest on the 27th?
It’s called the billing cycle. Exactly how the companies pick the dates isn’t clear, but I suspect the procedure involves astrology, hooded figures and the Mayan Calendar. Either way, most people make the mistake of not checking. All it takes is a 5-minute phone call you know?!
Just in case it hasn’t dawned on you yet, we’ll break the news to you – if you have six different credit cards, you’ll need to track the dates for all six of them! Hope you like spreadsheets!
So there you go – the reason we have this many defaulters. Don’t get us wrong: some people get into debt because of situations they really can’t control, like sudden medical costs. But for the majority, it’s a combination of ignorance and inattentiveness. Credit card debts can be avoided. Even if you’re not into heavy accounting.
Have you ever been in Credit Card debt? Comment and let us know!
Research by: Shubhreet Kaur
Keep updated with all the news!
Get the latest personal finance tips and tricks delivered to your inbox!
We promise never to spam you!