How to get out of your Credit Card Debt ~ Pinoy Reviews

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Thursday, April 10, 2008

How to get out of your Credit Card Debt

A lot of Filipinos are knee-deep in debt. The most common cause of debt are credit cards. Credit cards are easy to come by, an agent calls you up, says things like free annual membership, no obligation on your part, and they even throw in a freebie or two. It's easy to get carried away when using your credit card. After all, you don't feel like you're actually spending your money. But come your due date, that's when you get surprised at the amount of money you actually spent.

Credit card interests are much higher than regular loans. Interest rates vary from 2.5% to 3.5% per month. Credit card companies would entice you by saying you don't have to pay the whole amount, you can pay the minimum amount due. However, when you do this, they would still charge you with interest and their interest is the effective interest rate which means that your minimum amount due is divided between the principal amount and the interest, the larger portion is usually allocated to interest so even if you have paid the minimum amount due for several months, you still feel like the principal amount is not changing.

In order to get out of debt, you need an effective debt management plan. In the US, some companies offer to do this for you. One way of debt management is debt consolidation. Debt consolidation involves combining all of your present obligations into one so you only pay one payment per month for your debt. For example, you owe 20,000 each to card company A, company B, and company C. You pay a minimum amount of 1,000 for each of these debt. What you can do is you take out a loan for the whole amount of 60,000 (or 70,000 to cover the discounted interest), negotiate with your creditor the terms of the loan, then pay off the credit card companies with the proceeds of the loan. If you pay that kind of loan in 2 years your monthly payment to your creditor would be more or less 2500-2800, depending on the interest rate you have agreed upon. In two years, you would have paid all your creditors using the same amount of money you're paying to the different credit card companies.

If you didn't take out the loan, it would probably take you 5 years to pay off all of your debt with the credit card companies considering the interest they are charging and the amount of your monthly payment.

5 Comments:

Suckered By said...

You are right about borrowing to pay off credit card debt because it is better than trying to pay the credit card companies directly. Because the credit card companies will never allow you to pay of your debt? Why? Because they like the income they get from their high interest charges and extra fees.

So if they sense that you are starting to reduce your overall debt to them they will increase your credit limit to keep you in their trap and continue charging high interest rates. This is consistent with their practice of predatory lending.

In the end even if you are bankrupt and cannot pay principal it is still okay with them because they have already made back principal plus interest anyway.

natalie1981 said...

Yep, I know how credit card companies work the system. Plus if you forget your due date they will also charge you with ridiculously high late charges. I actually thought of this post because my officemate was having a hard time paying off her credit card debt and I suggested that she take out a loan instead with our Office cooperative. She was paying 1,500 per month and the credit card company is charging her an interest of 1000 per statement date! WTF is that?!

Suckered By said...

All those painful fees are what are called "revenue enhancers" or rather, "career enhancers" for the account officer. If the account goes bust in the future, the credit card officer hopes it won't be when they are still handling that account.

I sympathize with your friend. You have given good advice, I hope she seriously considers it (not all lenders or account officers are predatory, even different departments within the same institution).

I hope she is not a working mom with kids dependent on a 2-income family. It's one thing to be paying -off credit card balances on the newest, coolest, cutest gadgets, it's a completely different matter when the credit card debt is milk and food for the kids.

Sad, but true (and the credit card company officers don't care, so long as they can continue to charge the high interest and fees to enhance their career records.)

Thank you for voicing and publishing your practical and sensible options on personal debt management.

Credit Answers said...

Credit card companies do try to keep you in debt. unfortuantly this practice is one of the thing severly hurting the economy now. Have you ever considered debt settlement to get rid of credit card debt. You dont need to take out a loan and sometime people dont even qualify for managgement programs. There are other alternatives.

Anonymous said...

Supreme Court declares credit card interest beyond 2%/month illegal:
http://sc.judiciary.gov.ph/jurisprudence/2009/september2009/175490.htm