Controlling Your Debts
The current global financial crisis has brought increased unemployment and redundancy to many households. It is no longer surprising to know that consumer debts, including credit card debts, are soaring higher than ever. In recent years average consumer debts have reached records levels and in many cases have got out of control.
While it is important to pay off all the debts you owe, you may not have sufficient money to cope with the monthly payment on all your existing loans. Prioritising or getting your debts in order keeps in you in control of your finances, and helps you pay off your credit card debts, personal loans, and home mortgage.
To make it easier for you to identify which debts should be paid off first, you may want to prepare a list containing all your loans. The corresponding interest rates, outstanding balance, and the required monthly payment must be found in your list. You can then proceed to sort your debts, starting with the loan which attracts the highest interest rate to the loans which are intended for investment.
If you are looking to take control of your finances and debts then you can start by following these simple tips
• Prioritize paying off personal credit card debt and other personal debts ahead of borrowings for investment (e.g. in property or shares). The interest on borrowings for consumption is not tax-deductible, making them more expensive. In contrast, interest on borrowings for investment can be deducted as an operating expense.
• Clear the most expensive debt first. This refers to the debt that bears the highest interest such as credit card debt. This is not necessarily the debt having the biggest principal amount.
It’s natural to target your efforts on the largest debt first but this logic is flawed. This may cost you more in interest. Consider this example: credit card 1 has an outstanding balance of $6,500 with 18% interest rate, while credit card 2 has outstanding balance of $10,000 with 11% interest rate. The basic interest charge on card 1 would be about $97.50 per month and $91.67 per month on card 2.
You can continue the process of paying off the credit card or personal loan which attracts the next higher interest rate until all of your credit card debts are paid off. Avoid getting into any further debt by using debit cards instead of credit.
• Make sure you pay on time. Pay at least the minimum required payment, but paying more than the minimum amount is really the best thing to do as you will eliminate the debt faster. But whatever you pay, never miss the due date. Being late on one or two payments will really burn your pockets. Credit card companies can do a lot of things when you miss payments — e.g. impose additional fees or increase the interest rate on your card. If that happens, it will become so much harder to clear your credit card debt.
• Consolidate your loans. Credit lines for debt consolidation are good options to help you lower your interest payments and speed up the process of becoming debt free. One way to do this is through balance transfer of credit card debts to a lower-rate credit card. Bear in mind that debt consolidation loans or transferring credit card debt into a low-rate card are just stop-gap measures. Do not use this as an excuse to go and clock up even more debt. The logic is to reduce your interest costs as far as possible so you can focus your money on paying off the actual balances rather than just paying interest. While the interest rates may result in lower repayments you should make at least the same repayments as you did before and if possible much more.
The rough economic times only adds more good reasons to choose today to start getting debts in order. List them up, sort them out, and proceed to knock them down.
Article by Richard Greenwood of click4credit.com.au
