Skipping credit card bills and loan repayments may sound like an easy way out when you’re financially tight. The consequences you need to bear are a whole different story.
Credit cards, loans and the increasingly popular Buy Now, Pay Later services contribute to the host of consumer debts that people deal with over their lifetime.
While everyone who borrows has the obligation to pay their bills and make loan repayments punctually before their due date, not everyone is in the position to do that every single time.
What would happen if you were to default on your payments? Well, this depends on the type of debt you have on your plate.
Secured vs unsecured debt
The main difference between secured and unsecured debt is that secured debt is tied to a collateral whereas unsecured debt isn’t.
Some examples of secured debts include home loans, car loans and lombard loans. The collateral for these three types of loans are your home, car and anything of high value (e.g. a collection of vintage cars, artwork, antiques, wines) respectively. Lombard loans are exclusive to affluent borrowers.
Unsecured debts include things like credit cards, credit lines, balance transfers, personal loans, student loans.
When is your debt considered past due?
Your credit card debt or debt on a revolving unsecured credit facility like a credit line is considered past due if the minimum payment isn’t made by the specified due date.
For non-revolving unsecured credit like term loans, your debt is past due if the instalment amount due isn’t paid by its due date.
A home loan or car loan is considered past due if the monthly repayment instalment isn’t paid by its due date.
In general, banks and financial institutions are not allowed to extend further unsecured credit to you if your credit card debt or any other unsecured credit facility is 60 days past due. This means there’s no chance of you raising your credit limits, applying and getting new credit cards or any other unsecured credit facilities.
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Consequences of not paying your credit card bills
1. Increased interest charges and late payment fees
Besides incurring late payment fees and interest charges on your credit card balance that continue to compound and snowball on a daily basis, you will also have to deal with higher interest rates hence even higher charges so long as you don’t pay up.
Instead of the already high 26.9 per cent p.a. that most banks charge, the effective interest rate applicable on your credit card account could go up to 29.9 per cent p.a. when your credit card account is past due. Most people don’t know this.
To bring the effective interest rate applicable on your credit card account back down to what it was, you need to make payments consistently for at least 3 months and make sure your card account is not past due.
2. Drop in credit score
By not making repayments reliably and punctually, you are doing yourself a disservice as it sabotages your credit score. Yes, missed or late payments can cause your credit score to dip. The longer or more frequently your payment is past due, the more your credit score drops.
People who can’t maintain a good credit score often find themselves deprived of essential financial products.
3. Reduced ability to apply for financial products and obtain favourable interest rates
Needless to say, skipping credit card bills will mar your credit report. According to ABS, a credit report that shows defaults or late payments — even 30 days late — might lower your chances of getting a loan, require you to pay a higher interest rate for a loan or not even limit the amount you can borrow!
This is certainly not music to our ears. The reduced ability to obtain financial products like study loan, home loan, and car loan could come as a rude shock to your dreamy life plans.
Also, the higher interest rate translates to higher charges — something which may affect your cash flow for months or even years.
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Consequences of not making loan repayments
1. Late payment charges and interest charges
As with all credit facilities extended to you by a financial institution, there will be late payment charges if you make late payments past their respective due dates. This applies even to an HDB housing loan, not just personal loans or credit lines!
The lender will also slap you with finance charges in the form of late payment interest charges if you don’t make your monthly instalment payment in full by the due date. The only exception is if you’re enjoying a promotional interest rate on your account.
Also, depending on the loan you’ve taken out and its T&Cs, the lender can terminate your loan if you do not at least make the minimum payment in full for two consecutive months.
When this happens, the total outstanding amount will be billed to you. It is your obligation to repay all that you’ve owed in accordance with the account terms.
2. Your collateral is at stake if you skip repayments for secured loans
It’s a whole different ball game when it comes to skipping repayments for secured loans like home loans and car loans. If you don’t repay your home loan or car loan for long enough, your lender has the right to repossess your pledged assets — your home and car in this case — and sell them to recover the loan.
3. Legal proceedings and seizure of bank accounts
Your lender can head to the court for a settlement if you default on your unsecured loans. This is especially true if the bank suspects you have the means to pay but are simply refusing to take responsibility for the money owed.
Legal action can be taken against you if you default on your personal loan, an unsecured loan. This may lead to the seizure of your bank accounts. For example, if you have money in a bank account with the lending bank, the bank may be able to utilise those funds within your account towards repaying your debt.
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4. Loan tenure extension
Some lenders may choose to extend your loan tenure, in addition to slapping you with late payment charges and late payment interest charges. Loans don’t come free — the longer your loan tenure is, the more interest you’ll have to pay ultimately.
5. Reduced or no access to crucial loans
Like it or not, your late or missed payments will be reflected in your credit report until you make the effort to clean it up.
As your loan repayment behaviour sends your credit score tumbling, an implication that could prove to be extremely pricey through and through is your decreased ability to obtain future loans, including crucial ones like home loans, business loans, personal loans in times of emergencies or even an education loan that lets you further your studies.
Even if they let you apply for these loans, the loan quantum that banks and financial institutions are willing to extend to you could be greatly reduced, too.
This can be very straining financially as it’s very difficult for most to cough up enough cash for, say, their home’s downpayment and monthly instalments with the tiny loan amount they’re eligible for.
6. Potential future employment hurdles
Depending on the job you’re applying for, a potential employer can request to see your credit report in all its glory.
Some firms have very strict policies in place regarding the hiring of people who are in debt or those who have defaulted before. The hiring manager may deem such behavior as highly irresponsible hence decide against employing you.
And if you are looking to make your mark in the finance industry, your credit score and credit history is more important than ever! Backed by the Monetary Authority of Singapore (MAS) since end November 2019, credit checks for employees and potential hires by financial institutions are apt.
Consequences of missing Buy Now, Pay Later instalments
1. Late payment fees
Despite the convenience and allure Buy Now, Pay Later services afford, consumers need to know that late payment fees exist. The amount charged for each late payment varies depending on which Buy Now, Pay Later service provider you’re using as well as the value of your order.
This can happen if you use a debit card to make the purchase but don’t have sufficient funds in your bank account. Pro tip: compare the late payment fees charged by Hoolah, Atome, Rely, Split and Pace at a glance.
2. Other fees and charges may apply
Besides getting slapped with late payment fees when you miss the instalment, other fees and charges may be tacked on. As of time of writing, Atome and Pace impose such fees and charges while Hoolah, Rely and Split do not.
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3. Freezing of your Buy Now, Pay Later account
Yes, you read that right. Your Buy Now, Pay Later account may be suspended if you have unpaid overdue instalments.
Atome has made it clear your account will be frozen while Pace has been upfront about deactivating such accounts. Hoolah and Rely may suspend your account if you miss your instalments.
4. Your debt can spiral out of control if credit cards are your mode of payment for Buy Now, Pay Later transactions
While you will never have to deal with account suspension or late payment fees associated with missing instalment payments when you use a credit card to pay for your Buy Now, Pay Later purchases, bear in mind you have to pay your credit card bill in full before the due date to avoid hefty interest charges and late payment fees.
Your credit card issuer has no qualms about billing you those extra charges.
In short, if you adore the incessant shopping sprees you can embark on thanks to Buy Now, Pay Later services, keep a watchful eye on your credit card bills and make sure you pay those punctually in full to avoid getting into credit card debt!
Regardless of whether it’s credit card bills or the different types of loan repayments you have on hand, it is crucial that you keep up with payments punctually as the consequences could be dire and far-reaching.
Set up autopay via GIRO, set up payment reminders or change your payment due dates so those multiple payment due dates aren’t all over the place and difficult to keep track of. Do everything you can to avoid missing payments, especially for the long-term.
This article was first published in SingSaver.com.sg.