Most financial experts and those who aren’t financially savvy will tell you that it takes little effort or time to rack up debt. Getting out of debt and getting back on your feet may sometimes be a long journey. But it isn’t impossible.
When you are in debt it is important to know what options you have before you. A popular way to get out of debt is to opt for a Debt Consolidation Plan (DCP). But most people would rather take a personal loan to pay their debts than opt for a DCP. This, in turn, increases their debt. So maybe learning to manage their finances and their debt better is what they need.
But to truly determine the best way for you to get out of debt, it is important to understand just what a DCP is and what the different strategies to manage debt are. This article explains both of these debt management tools so that you can make the right decision.
What Is a Debt Consolidation Plan (DCP)?
DCP is essentially a tool to help you manage your payment obligations. If you have several unpaid credit card bills or high-interest unsecured loans and are finding it difficult or even impossible to make monthly payments, then a DCP can help you.
With a DCP, you can combine all your existing unpaid credit card bills and all unsecured loans into one loan with a low-interest rate. A credit card probably has an effective rate of interest (EIR) of around 25% p.a., but interest rates on DCPs are usually anywhere between 7% p.a. and 11% p.a. DCPs, however, aren’t available to everyone. To be eligible for a DCP, your debt needs to be greater than 12 times your monthly income.
Under this plan, you can still use one credit card that may be offered to you by a participating financial institution. This card will have a credit limit that is equivalent to the income you earn per month. The bank that offers you the DCP will also automatically open a revolving line of credit for you so that you can take care of your daily expenses.
Things to keep in mind before taking a DCP
DCPs are classified as unsecured loans and as such will be recorded on your credit report. This credit information will stay on your report for 3 years after you have closed your DCP.
This being said, DCPs are still a better way to be free of debt than taking new loans to clear earlier payments.
If you think you can dip into your savings or ask a relative to help you with your debts, then you should think about various strategies through which you can manage your debt so that you don’t face a similar situation in the future.
What Are the Popular Debt Management Strategies?
Taking a loan to pay a loan is just trading one liability for another. What will help you in the long-run is the ability to manage debt. Here are some strategies that may help:
1. Debt Management Programme
Credit Counselling Singapore, is a charitable organisation that helps with debt counselling. They have various programmes to assist those who have severe debt. Their Debt Management Programme (DMP) is a monthly repayment plan that allows you to repay your debts in affordable instalments over a period of time.
This plan is a voluntary arrangement between you and your creditors and is best suited for those who have enough money to at least make the minimum payments on their debts.
2. Track your spending
The first step to effective debt management is tracking all your expenditure. Make note of every dollar that you spend and what you spend it for. This way you will know exactly where your money is going. For instance, if you realise that you are spending way over your budget on eating out, consider cooking at home so that you can cut down on those expenses.
3. Set limits on your spending
Once you know what you generally spend on, set a spending limit for each category. These limits can be daily, weekly or even monthly. For instance, if you buy groceries every week, set a weekly limit and make sure that you don’t cross it. If you think you may find it difficult, then ask a family member or a friend to accompany you to make sure that you stay within your spending limit. Budget how much you can afford to spend every month (don’t forget to include rent and utility payments) and make sure that you don’t go over it.
4. Avoid impulse shopping
Retailers love impulsive shoppers. In fact, most marketing strategies are created keeping this category of shoppers in mind. They advertise “flash sales” and provide you with “once in a lifetime offers” so that a sense of urgency is created and you become more than willing to use your card. But don’t give in to this impulse, no matter how tempting. It is always a good idea to go home and think things through before deciding to buy something that you haven’t budgeted for.
5. Pay expensive debts first
Always pay off debt that has the highest rate of interest first. What does this mean? Well making just minimum payments every month on all your bills and loans won’t help you be debt-free. To be free of debt your monthly payments need to be more than just the minimum amount. Pay credit card bills with the highest rate of interest first and then move on to the next. This way your debt will slowly but surely reduce.
Save a little every month and not just when you have extra money. Savings can come in handy during any sort of emergency and will reduce your dependence on unsecured credit. Your savings, in fact, is key to preventing you from getting into debt in the future.
So, Debt Consolidation Plan or Debt Management Strategy?
DCPs are extremely helpful if your debt is unmanageable. Even though a DCP may hit your credit score, you will still be debt-free once the tenure of your loan has ended. So, if you are looking for a way to gain control over your debt in the short term, you should opt for a DCP.
Debt management strategies, on the other hand, are long-term changes that you need to make to your lifestyle. These strategies involve a lot more than just helping you manage your current debt. They also ensure that you end up adopting a financially healthy lifestyle once you are debt-free.
At the end of the day, a DCP may help by making sure you pay a lower rate of interest on your credit, but you will still need to adopt these debt management strategies to ensure that you don’t fall into the debt-trap again. So, to say that one debt management tool is better than the other would be incorrect since you need both to help you live a life that is free of debt.