By Joel Barretto, CFPⓇ | via Negosentro.com |
So you finally realized that you have overextended yourself and your debts are out of control. If you don’t do something soon, chances are you will be in debt for the rest of your life. So what now?
It’s time for debt rehabilitation! Just like alcoholism, gambling or drug addiction, credit card debt is a sickness that can be thwarted with the right motivation and proper guidance. Therefore, the first step to recovery is admitting that you have a problem. Next, you will need to change your mindset and perhaps your lifestyle.
Consider that current yearly interest rates on credit card debts in the Philippines today, ranges between 30% – 42%. That means that on a P10,000 credit card debt, you are paying roughly between P250 – P360 per month in compounding interest. `So ask yourself this… were those shoes you bought at 50% sale really a good deal, if you have to pay 30% in interest per year? Or did those shoes just get a lot more expensive 2 years later?
Also consider that paying the monthly minimum amount on a P10,000 credit card debt at 30% yearly interest, will take about 47 years to pay off, at which point you would have paid about P46,800 in interest to the bank. That’s over 4.5 times more than you originally borrowed!
On a positive note, your bank probably loves you to death. They will gladly waive that checking account fee and give you a free pen next time you come in. Oh, and you never have to fall in line, because you’re special (whooptidooo)!
Now that you have come to realize the evil nature of sustaining credit card debt, it’s time to cleanse yourself and take action! By following this simple 4 step process, you will pay off your credit card debts in no time:
- Cut off the source of the problem – You commitment to yourself begins with cutting up those credit cards. If you cannot use a credit card responsibly, then you have no business using one. You also cannot pay off your credit card debts if you continue charging on it, so cut it all up!
- Negotiate your interest rates – I recently read a Registered Financial Planner (RFP) advise his readers to pay off the smallest balance first and work their way to the larger balances, which I couldn’t disagree more. It makes more sense to pay off the credit card balances with the highest interest rates first, regardless of the balance amount. So your first task is to call your credit card companies and negotiate the lowering of your interest. You’ll be surprised how they will be happy to work with you on this.
- Consolidate – Once you have negotiated the interest rates, find the one with the lowest interest and ask them if they have any promotions for balance transfers or if they will even allow it. If possible, transfer as much of the balances from the credit cards with higher interest into the credit card with the lowest interest.
- Never pay the minimum – Based on my previous example on a P10,000 credit card debt at 30% per year interest, it will take you 47 years to pay it off with minimum payments. If you were to instead pay P324 per month on that same debt, you will pay it off in a little less than 5 years. That’s 42 years less!
Joel Barretto, CFP sold his financial planning practice in Irvine, California U.S.A. to promote financial literacy and awareness in the Philippines. He is a respected Certified Financial Planner practitioner with over 24 years of experience in helping people optimize, manage and protect their wealth.
He is a public speaker and lecturer on a variety of financial planning issues and strategies. With a passion for entrepreneurship, Joel dabbles in venture capital projects and mentors up and coming entrepreneurs on growing their start-up companies. He is a 2nd degree black belt in the martial art of Kempo and enjoys performing and directing stage musicals for community fund raisers. You can reach Joel at firstname.lastname@example.org.