People often have selective perception that causes them to pile on their credit card debt. To help Singaporeans get out of the large debts, one could opt for a debt consolidation plan. In social psychological terms, this cognitive bias is called the anchoring-effect. We tend to rely too heavily on one part of the info that’s offered in the beginning while making decisions.

About 5% of the Singaporean population make use credit cards and personal loans. A 2016 report form Strait Times suggested that there was an amount of S$288.4 million overdue in unsecured debts in Singapore. This amount had increased by 75% in the last five years.

The number of people in Singapore that have a credit card debt is shocking. D.B Credit Bureau reported that credit card holders between the ages of 21 to 30 are more prone to avoid paying their outstanding balances.

Credit card holders are encouraged to pay their credit card bills in the stipulated time in order to avoid high interest late and late payment fees; They also earn rewards if they do so. However, some Singaporeans don’t maintain a clean balance sheet. Cognitive biases and social psychology can explain why.

Anchoring Effect

To comprehend why quite a lot of Singaporeans aren’t debt-free, we have to understand what the cognitive bias, anchoring does.

In short, when trying to make decisions, individuals often tend to use the first bit of information to make the successive judgements.

Once the anchor that is the initial judgement is established, other decisions are based by adjusting or drifting away from that particular anchor and in essence, there is often a predisposition inferring other information on the basis of the anchor.

In money matters, when numbers are involved, the anchor refers to the first number we have seen or recall, even though it may be entirely unrelated number. For example, initial offers have a strong effect in price negotiations. MIT undertook a study where M.B.A students were asked how much they would agree to bid for a set of random items, all of which they did not know the price off. Prior to the auction, they had to note down the last two numerals of their social security numbers. The scientists noticed that the student’s bid amounts were prominently predisposed by the last two digits of their S.S.N, even though the Social-Security Numbers had nothing in common to the price of the item that they were bidding for. Students who had noted down a larger number bid on a significantly higher amount in comparison to those who had noted smaller numbers.

Is the cognitive bias of anchoring-effect contributing to the growing debt problem of Singapore, if so then how? The two most prominent numbers we see here are the credit limits and the minimum monthly pay-out.

Understand How Your Credit Limit Works As An Anchor

First have a look at your credit limit, and consider these two situations below:

Situation one: Your salary is S$3000 a month. You see the latest iPhone X selling at $1888. Which of these two options will you agree with more?

Option one, the phone seems reasonably priced. Option two, the phone seems expensive.
Situation two: Your salary is S$3000 a month. Your credit card has a limit of $10,000. You see the latest iPhone X retailing at a price of $1888. Which of the following options will you agree with more? Option one, the phone seems reasonably priced.  Option two, the phone seems expensive.

If you feel the phone is easily affordable in situation two, then you are likely to run into credit card debts. When we have a credit card, the card limit is set as the first anchor due to which we are more enthusiastic to spend even though you may not have that money. Studies show that there is a connection between thinking about the money you may have in your account and increase in expenditures.

Understand How The Minimum Pay Out Works As An Anchor

A high credit limit will make you spend more money and the minimum monthly pay-out may get you caught up in debts. Warwick University did a study where they saw that card users who had a pending balance which they were unable to pay out each month, only focused on the minimum pay out mentioned on the bill. The participants in the study only looked at paying the minimum amount as though it was assumed that this was the final amount to pay. Even those who could pay a large amount still paid only the minimum pay-out.

Once the banks increased the monthly pay-out or removed it, cardholders paid more each month. Upon further studies, scientists observed that even if the minimum pay-out was changed to aid in clearing the debt within 36 months, users once again started anchoring on the minimum number. To understand this in other words, due to anchoring, the minimum monthly pay-out makes credit card users retain they debts by even though the rate of interest has been manipulated. This makes card users in Singapore end up with rollover debts and unknowingly pay more interest than required.

Overcome The Anchor Effect

The anchor-effect is one of the rare few cognitive biases that can be overcome and benefited from. If you are one of those card holders who are stuck in a rollover debt, we would advise you to overlook the minimum amount in your credit card bill. In its place knowingly anchor yourself on a sum of money that you’ll be comfortable in paying out each month.

Think of an amount that would let you clear you of your debt within a year or lesser. Don’t forget to consider the interest-rate as well. This is the way you should estimate how much your monthly pay-outs should be. (Presentdebt x 1.YY) / 12, where YY = annual interest rate.

Let’s assume the amount due is S$6,000 on a credit card with an annual interest of 30%. The calculation would then go like this:
Step 1: S$6,000 x 1.30 = S$7,800
Step 2: S$7,800 / 12 = S$650

To clear your debt, you will have to pay S$650 per month for a year. If it’s difficult for you to close your debt within the year, aim for 18 or 24 months. Don’t forget that interest is applied every month, so if you clear more each month, the more you reduce your interest rate. Simply put, the faster you pay the lesser the interest. After you’ve done the maths for your monthly payments; place a sticky note somewhere you can observe it every day. In this way, you are making this number your anchor, instead of the minimum pay-out amount.

A Trick To Be Smart With Your Credit Card

The credit limit is a figure of how much you can borrow. This does not measure your ability to pay. You could have a credit card with a limit of almost $15,000 but your job my only fetch you $5000.

To ensure that you don’t spend extravagantly, take a piece of paper and note down the actual amount of money you can spend monthly and paste it on your credit card. Assume this to be your actual credit limit on the card. Once you reach the limit, put the card away for the rest of the month. Cards are a great financial product that can fetch you rewards and help you in saving money if you use it responsibly. Once you understand how credit cards work, you will be able to you will be able to use it freely and keep your debts at bay.

In Doubt, Lower Your Interest

Regardless of your efforts, if you find it difficult to get out of your debt, try focusing on lowering your interest rate. If you owe banks a large amount that’s more than 12 times your average salary, It may be very difficult for you to pay even a minimum amount. In this scenario, lowering your interest this will help you in reducing your monthly pay-outs. This will help you in managing your money better. A way to cut your interest rate down is to sign up for a debt-consolidation plan. DCP plans often offer interest rates of 10.5% per annum which is lower than the rate of interest a credit card charges. Credit card have an interest amount of almost 25% per annum. Dropping your interest-rate will give you huge savings in interest payments, thereby lowering your overall debt amount. Lower interest rate and smaller outstanding debts means that money spent on monthly pay-outs also will go down. This will increase your cash flow and you will be able to meet other expenditures or be able to save your income for emergencies.

DCPs also offer you a rotating credit facility that can be equal to your monthly salary. You can also decide how you would like to repay; you can set a period which ranges from 3 to 7 years. Taking a DCP not only makes you pay your debt at a reasonable pace but also gets you a forecast of when you’ll be debt free.

Having a financial timeline will help you better manage your expenses. It will also get you relief and incentive.

Find out more on how you can manage your debt at

Leave a Reply

Your email address will not be published. Required fields are marked *