Good debt, bad debt

Published on Jun 30, 2013


One type of debt reaps returns while the other has no investment value

By Rachael Boon

Credit cards, car loan most common debts for young

While experts recommend young people should start investing as soon as possible, those in their twenties will often find it hard to do so as they are busy clearing their debts.

Take Mr Perry Siow for example. At 23, he racked up a debt of more than $50,000, because his business partner ran away with everything from the accounts of the trading firm they had set up together.

This happened during a business trip to Indonesia to source for more clients, and the former derivatives trader returned home to find his dreams of earning big bucks completely dashed.

To add insult to injury, he was a guarantor for a friend who had borrowed $20,000 from a loan shark.
Mr Siow, 37, an associate senior vice-president at realtor HSR, said: "No one taught me about money management, I was depressed. I also had to pawn my mother's gold jewellery to help with my debts. I get emotional thinking about that."

Faced with immense pressure and bouts of suicidal thoughts as a young adult, he found religion which drove him to find a new job and cleared his debt little by little.

The Christian found his calling in real estate and by the second year of working, he paid off all debts and redeemed his mother's gold.

It was a life of all work and no play for Mr Siow, who skipped all social functions and would be distributing real estate fliers until 2am. "I was also a part-time trader for a client and if I had time, I'd be a banquet waiter from 6pm to 11pm, even though that earned me only $20 per hour. I worked every day for two years."

Youth debt in numbers
According to Credit Counselling Singapore (CCS), last year it counselled 563 people in debt, aged 35 or younger.
The male to female ratio was 69:31, and 374 had A-level or higher education, while 217 were married with children.
The lowest amount of debt reported was $3,401, and the highest was $707,772, which was lower than 2011's highest reported debt at $875,203.
In a report released early this year, the Credit Bureau Singapore found that motorists aged 21 to 34 have the highest delinquency rate - a measure of failure to pay their monthly instalments within 30 days - while consumers above 54 have the lowest delinquency rate, a trend that is consistent with other loan products.
On the other hand, those aged 21 to 34 are managing credit card payments well, compared to the overall population, with only 3.66 per cent in delinquency - where one's credit card payments are 30 or more days overdue - compared with the overall population at 4.95 per cent in the three months to March.
Good and bad debt
But financial planners say there is both good and bad debt.

Ms Geraldine Lam, investment specialist at independent financial advisory firm Providend explained: "Good debt may be defined as debt incurred to reap investment returns. A good debt should also be one that the debtor can afford to repay on time."

Examples of good debt are mortgage, property, study or business loans.

Mortgage loans are considered good debts because property generally appreciates, like from 2002 to last year, when residential property prices here appreciated by about 6 per cent per year, said Ms Lam.

Hence, for young adults looking to move out on their own or planning to wed and buy their first home, a mortgage loan may help.

Ms Lam said: "Taking up a mortgage loan is not only necessary for most people to have their own residence, it also makes economic sense as paying for a property through instalments allows money to be freed up for other uses such as investments."

SingCapital chief executive Alfred Chia added that "taking advantage of other people's money, also known as the bank's money" when interest rates are low, makes a lot of sense especially in a property bull run, but warns of the risk of being in debt.

For study and business loans, Ms Lam said the long-term returns of a university education and a profitable business "far outweigh the cost of paying interest on the debt incurred".

On bad debts, Mr Chia said they are often debts "incurred for purchases that are useless, or for depreciating assets".

A 60-inch TV set will not produce an income, as well as many brand-name bags, "though many ladies are not going to agree with that", he added.

Credit Counselling Singapore says overspending, followed by job-related debt, are the top reasons for those who seek counselling.

Common debts of young adults
Credit cards and car loans are the most common causes of debt among young adults.

Ms Chng Bee Leng, head of mass affluent at OCBC Bank, said that people in the age range of 18-35 tend to have study loans to repay for tertiary education, and credit cards for their various expenses.

OCBC Bank has also found that young adults tend to use credit cards for expenses such as dining (43 per cent of customers), fashion (37 per cent), and travel (34 per cent).

Mr Chia has advised young clients with more than $500,000 in credit card debt.
How do they get to that stage?

He said: "Most of the time, it's the attraction of spending future money to enjoy the current moment, for travel, and those interest-free instalment plans.

"Having a car and spending their money excessively give them a sense of freedom.

"And the impulse to get a coveted item is stronger than the logic that it is too expensive."

Ms Pam Siow, 32, chief executive of online marketing coaching business Internet Biz Owners Club, went through all that when she got her first credit card at 25.

Four credit cards and three years later, things spiralled out of control as she found herself $14,000 deep in credit card debt.

She recalled: "Well, at that point in my career, I had earned a degree of spending power. And after spending a good deal of my life feeling like my finances were not secure, I felt it was time to let loose and rebel against my 'former life'.

"With that, credit cards became my greatest source of debt. The thing is, I didn't use cash because I was spending money that I didn't have."

She spent 20 to 30 per cent more than what she could really afford with her monthly salary then, on clothes and holidays.

At this point, Providend's Ms Lam would suggest cancelling "all credit cards and lines of credit to stop impulse spending, and be forced to spend only cash".

"Non-essential expenditure has to be severely reduced and a strict budget imposed."

Websites such as financial education portal MoneySense have useful tools such as debt and budget calculators to help young adults, she added.

Ms Chng also suggested OCBC Money Insights, an online financial management tool available on OCBC online banking.

She said that it "can help young people be aware of their spending trends and cash flow position".
Public relations executive Eunice Lim, 23, does not have major debts, but said she does enjoy shopping and forgets to pay her bills once in a while, leading to a late payment penalty. Today, she is more mindful of payment dates.

Managing debt
Just like how debt forced Mr Siow to find a way out and eventually find his passion in real estate, Ms Siow discovered a knack for Internet-related businesses because of her dire situation.

She said: "This turnaround began at the lowest point in my situation, when I made it my mission to pull myself out of it and achieve my dream life.

"I managed to get out of debt by starting my first online business, which helped me quit my marketing job within four months too and pay off my debts within one year. This resulted in helping me start my Internet marketing coaching business."

Mr Siow - an avid reader of books on debt - has one unique tip.

Be gentle when it comes to speaking to creditors, he said.

After all, it was how he managed to get extensions from the loan shark and banks.

"Being hostile and not answering your creditor's call are not going to work. When they can't get hold of you, it may lead to immediate action being taken," he said.

"Having debt is not a crime but it has just been mismanaged. Take it easy and be calm, negotiate with your creditor. They will understand it because they just want their money back."

He added that young adults should be pro-active about clearing their debt, instead of moping about it, and "don't buy something that you don't need to impress people that you don't like".

Armed with first-hand knowledge of how debt works and how to manage it, Mr Siow is fine with having some good debt, such as paying for training for his staff.

He said: "Remember that getting into debt is easy, but getting out of it is difficult and extremely stressful."

rachaelb@sph.com.sg