A credit card can be a two-edged sword. Use it properly, and you’ll surely enjoy its advantages like convenience and the exclusive incentives that come with wise spending. Overuse it, and the debts that you ignore will come back to bite you.
Paying off credit card debt should be second nature to you—very much like how you settle your monthly electric bills or home mortgage. But even the most responsible credit card user will struggle with their balances, especially during this pandemic when people can’t go to work or they’re compelled to accept reduced salaries. Regardless, you’ll find a way out if you know how to pay off credit card debts.
We’ve come up with a list of ways that may help you pay your credit card debt much more easily. Remember, though, that what has worked for others may not work for you, so you must analyze your situation thoroughly.
Why You Should Pay Off Your Credit Card Debt Quickly
Financial freedom is the ultimate benefit of successfully dealing with your credit card debt. But if you want to go into the specifics of this benefit, here are the things you need to take note of:
Deal with Less Interest
When your debt drags on, you’re just prolonging your agony. You’re not only paying for the amount of money that you’ve borrowed; you’re also paying for the interest. So, the longer you pay off your debt, the longer you deal with the interest. And if you falter along the way, you’ll also cover the penalties.
If you managed to pay your credit card as quickly as possible, you could end up saving thousands of pesos in the long run.
Improve Your Credit Score
The way you use your credit line is one of the most important deciding factors for your credit score. When you pay your balances regularly and promptly, you’re likely to have a good credit score. And remember, a good credit score will unlock a lot of opportunities for you. For one, it may help you qualify for mortgage and car loans easily. On top of that, your loan may have a low interest, since the lenders know that you’re a responsible payer.
Increase Your Savings
When you’re paying off your credit card debt, a part of your monthly income goes toward it. But if you’ve dealt with it quickly, the money that could have gone towards repayment will now go into your savings account.
Always remember this: whenever you use it, you’re actually borrowing from your future income. But if you pay off your debt quickly, you get to retain a certain portion of your what you will earn in the future.
Use Your Money Without Feeling Guilty
When you don’t pay your debt right away, you’ll be left with less money that you can use for other things you need or want. You may even feel guilty when you buy that fancy leather handbag or treat your family to a delicious lunch.
And since you can’t afford some things because of your debt, you’ll be compelled to borrow money. In turn, your problem may get worse, and you may end up being trapped in a vicious cycle.
Reduce Your Bills to Pay
You have many bills to pay, and your credit card debt is just one of them. The more creditors or lenders you owe, the more stressful your situation will get. Deal with your credit card debt right away, especially the small ones. That way, you’ll be receiving fewer statements in the following months. Ultimately, you’ll have one less thing to worry about.
How to Pay Off Credit Card Debts
Well, it’ll largely depend on the size of your debt and the amount of money you make.
The goal here is to keep your debts from piling up and becoming an insurmountable mountain. Here are some techniques on how to manage credit card debt, including their pros and cons.
1. Debt Snowball Method
To efficiently deal with your debt, you may need to change how you view it. For one, you can think of your debts as tasks that you need to cross out of your list. If you’re using this perspective, the debt snowball method may work for you.
It simply works like this: first, you’ll put more money into the smallest debt on your list. While you’re doing that, you’ll also be making small payments on your other debts. Every time you finish paying off a balance, you’ll then move on to the next smallest debt—put more money toward it while making small payments on your other debts. You get the drift.
Pros: This is an ideal method if your debts are small and still manageable, as you’ll be able to pay them off quickly. Seeing each debt gets crossed out one by one will also give you a boost, which will inspire you to finish all your credit card-related obligations.
Cons: Apparently, the snowball method works best for small debts only. If you’re going to use this for your large debts, you’ll find yourself paying the bank or credit card company much longer. Extended terms of debts mean that you’ll pay more interest over time.
2. Debt Avalanche Method
The debt avalanche method is quite similar to the debt snowball scheme, except that this will make you deal with the largest debts first. With this strategy, you’ll start paying high-interest debts first while making small payments on your other debts. After paying off a debt, you’ll then move on to the next biggest balance while also making minimum payments on your other debts. The process goes on until all the debts on your list are eliminated.
Pros: Primarily, the debt avalanche method helps you save more money in the long run. When you quickly finish paying off large debts first, you won’t have to worry about paying more interest over an extended period. This means bigger savings on your end.
Cons: This may not be the most suitable payment scheme for people without large disposable income. If they insist on using this method, they may find themselves borrowing money just to deal with their high-interest debt.
3. Debt Consolidation Loan
If you have multiple debts, such as a home mortgage, car loan, and credit card balance, keeping track of them can be confusing. You may even miss some due dates since you’re making separate payments for each debt. To simplify your finances, debt consolidation may be the answer.
With debt consolidation, all your debts will be combined into a new loan. This means that you’ll be able to make a single payment every month.
Pros: Because you’re making only one payment for all your debts every month, you won’t be missing your due dates. And when you don’t miss any due dates, you’ll be able to pay off your credit card balance (together with your other debts) much more quickly.
You’ll be paying the same amount every month, so you already have an idea how much you should set aside. Furthermore, you can avoid the high-interest rate of it. This is because you’ll be covering only the consolidated loan’s interest rate, which is usually much lower than your credit card’s.
Cons: Banks may offer this service only to people with a good credit score. Keep in mind also that the interest rate of the new loan will depend on your credit standing, so there’s a chance that you could end up paying a much higher rate. You may also cover some upfront costs, such as balance transfer fees and costs of loan origination and closing.
4. Balance Conversion
Balance conversion is a repayment scheme where credit cardholders can convert their outstanding balance into manageable installments. For example, if the total amount of all your purchases for this month is PHP 15,000, this amount will be converted into the agreed number of installments. So, if you agree to pay that PHP 15,000 in six months, you’ll be paying PHP 2,500 per month plus the interest. Banks such as HSBC, RCBC, BPI, Security Bank, and Metrobank offer this credit card feature.
Pros: This method is a good choice if you’re buying big-ticket items in one go (e.g. appliances and furniture for your new home). Banks also have flexible payment terms, with some offering installments of up to 24 months.
Cons: If you have a quite unfavorable payment record, you may not be able to avail of this plan. This is because banks usually offer balance conversion only to cardholders with good credit standing. Furthermore, some banks require a minimum outstanding balance that can be converted into installment payments.
5. Balance Transfer
A lot of experienced cardholders use this method to move their credit card debt to another credit card (usually a new one) that has a much lower interest rate or more lenient payment terms.
Pros: If you transfer your outstanding balance to a credit card with a much lower interest rate, this means that you’ll be paying less over time. When you’re paying less interest, a larger portion of your payment actually goes toward the reduction of your balance. Moving your balance to another credit card will also allow you to take advantage of that credit card’s better payment terms, such as a longer grace period, lower penalties, and much more exciting rewards.
Cons: Usually, only people with good credit standing are allowed to transfer their balance while availing of the new card’s low interest rate. If you happen to have a bad credit standing yet you insist on transferring your balance, you’ll only be allowed to avail of the new card’s regular interest rate. Also, the new ones may have higher annual fees and other miscellaneous costs.
6. Credit Card Amnesty Program
The Bangko Sentral ng Pilipinas and member-banks of the Credit Card Association of the Philippines have come up with a credit card amnesty program called the Interbank Debt Relief Program (IDRP). Through the IDRP, you can consolidate or restructure your credit card debts. This program offers affordable monthly amortization and much lower interest rates.
Pros: You can enjoy the same interest rate for all your credit card accounts (maximum of 1.5%). If you have sizeable debts, you may be given a longer repayment term (as long as 10 years). Among the best things about this amnesty program is that your credit history won’t be negatively affected. This makes getting back on track possible.
Cons: Your bank has to be a member of the IDRP. The requirements can be pretty strict, too. For example, some banks may reject your application for the program when they’ve found out that you’ve used your credit cards for purchases related to luxury, gambling, and extensive travel. If you’re more than 65 years old, the bank may also reject your application.
How to Avoid Credit Card Debt
Truth be told, getting out of massive credit card balances can be pretty tough, and subsequent recovery may prove to be quite challenging. So the best advice for credit cardholders would be “Prevention is better than cure.”
Here are four tips to avoid falling into the debt trap.
1. Don’t Miss Your Credit Card Payments
If you’ve got a balance on your card each time the statement rolls in, that’s instant debt. Remember that your credit card balance also incurs interest and late fees when they aren’t paid on time.
Missing payments opens you up to higher fees to pay and being unable to use your card. It also means that your credit rating is perceived in a negative light, making it difficult to get loans.
Say you’ve got a 2% interest rate on your credit card, and a recent purchase worth PHP 10,000. If the minimum payment a month is around PHP 500, that leaves a PHP 9,500 balance with an additional 2% added to it every month that it goes unpaid. If you pay only the minimum, you’ll end up paying a lot more interest, and you’ll find it hard to get out of debt.
Here are the best ways to pay off your bill so that you end up with little or no credit card debt:
- Pay your bill in full and on time
- If you can’t pay in full, pay as much as you can before the due date
- Always be mindful of the due date
- Keep your statements archived (so you can track your purchases and make sure there are no fraudulent transactions)
2. Set a Personal Maximum Balance
Providers assign a credit limit when your card is approved. If you aren’t careful with the way you use your card, it’ll be easy for you to max it out.
Whatever the maximum balance is on the card is, set your own monthly charge limit at an amount you feel that you can easily pay off on time, and don’t go over it.
Now that credit scores may become a thing in the country, here’s one other reason to stay well below your limit: standard credit scores use credit utilization as a major metric. This is the ratio of credit outstanding to maximum credit available on your card. The lower this is, the better.
Read more: Credit Card Dos and Don’ts
3. Use Credit Card Cash Advance Only When Necessary
Making frequent cash advances using your credit card is a quick way to accumulate debt. It's because cash advance comes with fees and a higher interest rate than the regular that for your regular spending.
So as much as possible, avoid borrowing money using your credit card.
4. Remember That Your Card is Not an Extension
Your credit card is not an extension of your paycheck or an emergency fund. Given the rising cost of living, the only real way to ensure that you aren’t driven into debt is to either lower expenses or build a better budget.
Credit cards do neither, and using them this way may hit your credit score in worse ways, and you’ll find yourself in hot water later on. So if you don’t have one already, build an emergency fund now, so you don’t go into debt if the worst happens.
You often hear horror stories about how credit cards put people into financial miseries that are almost inescapable. These cautionary tales might have given you a negative impression or it might have even made you unreasonably anxious about using one.
Let’s put it this way: credit cards don’t cause debts. They are just tools, and it’s always up to you how to use them. Unfortunately, a lot of people are either attracted to the purchasing power lent to them or just clueless on how to best use the card.
And because the usual problem is that people spend more than they make, one has to master the art of discipline. You need to practice mindful spending, whether you’re a credit card newbie or you have multiple credit lines at your disposal.