I have been a debt accumulator since I started earning more bucks abroad. Way back in my country of origin, I didn’t even have an ATM card, I just get my salary cash and pay everything in cash. Life was so simple. But when I step in here, loans and credit cards are just like flies surrounding you and you just have to say yes even if you don’t mean it so they could fly away. You just have to fill up the forms given by the agent who is almost present every day in the office, no need for bank appearance or follow-ups, you just have to wait and you’re on your way to debt. Well, that was 2006 and since recession hit the city, the flies are nowhere to be found. 🙂 Much better.
I experienced a year loan in 1% interest and after I have had a credit card in 6% total monthly interest for which I had paid for almost 2 years & 8 months. You read it right. I paid the credit card longer and in higher interest rate. Well that is because I never stop using the card for 2 years. I pay then I acquired debt again and I just realized to stop when it felts like nothing seem to change with my payment schemes. You see, the loan has a time frame and has fixed interest unlike of plastics, they vary the interest on your outstanding balance so the rate is changing. The more you acquire the higher the equivalent of interest to pay. But I am not saying that it’s better to have a loan and credit cards are really bad. Loan if you’ll be using it as a leverage tool in multiplying the earnings and credit cards could also be your friend, if only you know how to use it wisely. I hope its clear.
As of my credit debt, when I understand how the interest works, I pledged to finish it in 8 months. I really sound crazy that time but having the determination in keeping that goal, I’ve made it with flying colours. How I did that? I give the credit to my brother. I didn’t ask for money but for advice. He has been my #1 mentor in almost everything so might as well asked his knowledge about my problem.
Here’s what I’ve done:
- Cut all the cards. Seriously? Yes! I get a scissor and cut it right away. But I left one of course; one which I thought would be the best among the others to keep. For emergency used only. Since it’s all cut, I don’t have anything to swipe. And the one I left? I keep it a place where I could hardly get it. Not in my wallet but in my luggage. 🙂
- Stop using the card. From that day on, my transaction are all cash. In this way, the interest is decreasing and I really feel the hurt in letting go of higher amounts in my hand. I became frugal. 🙂
- Tabulate all the credit. I list out all the cards I have to pay, with the outstanding balances in excel sheet and figure out each cards interest rates. This way, I have a clear idea of the amount which I have to pay and which card has the lower & higher interest.
- Set an amount you can afford to pay each month. Paying above minimum is better. For example you can afford 2000 aed per month. You can disseminate this amount equally or have a percentage basis for this amount for each of your credit card. Formula : divide your total credit to the amount you could set aside and this way, you can calculate how long you will need to pay till it become zero balance. (Just remember that you no longer use the card.)
- Choose a strategy : Snowball Theory or highest interest first? I prefer snowball or the lowest interest first. Why? Because the credit card with lower interest got to be finished easily and once you accomplished something you became eager to be zero-debt.
- Declare your freedom day. Nothing seems to be more interesting than having a specific date on achieving a goal to be debt free. Marked that date and focus.
- Stick to the strategy and keep a status for payments. Monitor each payment made and at the end of the challenge, you can assess how much the interest you just have paid.
- Apply for a credit clearance. Once you have completed one card against the other call the bank right away and apply for a clearance. This will take time but be patient in always following up for your request because most of the bank they will not respond right away, some might just refuse to cut off your card and they will ask you to just keep it especially when you are a good payer. So whether they like it or not, apply for the papers.
I also thought of using my savings as a payment for my debt, but I never did. I consider that impractical if you are fighting against recession but I believed it also works. Nowadays savings are only 1.5% in interest rates or 4% in Time deposits which is lesser than the average rate of a credit card. So rather than keeping the money in lower rates, just pay it all in your debt!
Lesson learned : Never buy on credit. There is no such thing as “easy” payment. Believe me, every payment would be hard. And when you meet that freedom day, learn to put your money in an investment on which you charge them interest not in debts that charge you interest.
Happy “Zero-debt” day! 🙂