Getting Deeper into Credit Card Debt? Follow these 4 Simple Strategies to Get Yourself Out of It.
When it comes to credit card, it is a true double-edge sword. On one hand, when used properly, credit card may come in handy if you experience a change in income or an emergency or prove your creditworthiness; on the other, it can lead you to financial ruin if you do not pay off your credit card balance in full every month.
The Covid-19 pandemic – along with the worldwide shutdowns had pushed economic activity to unimaginable lows, triggered unprecedented financial challenges for many individuals and families. According to a recent study conducted by the Credit Counselling and Debt Management Agency (AKPK), the financial stress faced by Malaysians since the pandemic began in the country last year has gone up some 35%. Many Malaysians who are tight on cash flow resorted to using credit cards to tide them over this period of financial crisis.
Unfortunately, many of them also fail to repaying their credit card balances in full each month, or just paying minimum amount of the balances each month, resulting in their credit card debts ballooning into unmanageable debts with the compounded interest charged on it.
How Much Credit Card Debt Is Too Much?
There are some indicators that can help you to review where you are currently stand with your credit card debt and they are:
1. A high debt-to-income ratio
Your credit card debt ratio is your total monthly credit card payments divided by your total monthly income. A debt-to-income ratio greater than 40% shows that you have too much debt. It’s recommended keeping it closer to 30%.
2 .High credit utilization (Using too much credit)
3. Struggling to make the minimum on credit card payments
4. Credit card payments are higher than all other bills combined
If you’ve realised you might have a problem with your credit card debt, it’s time to take back control with these 4 strategies.
1. Evaluate Your Finances and Create a Repayment Strategy Accordingly
Before you begin to attack your credit card debt, it’s necessary to take a cold hard look of your current credit card debts situation in order to help you to decide which approach to employ to reduce your debt.
Make a list of your every credit card debt, which should include the balance and the annual interest rate – the price you’re charged to borrow money- for each credit card. Even if you’re unable to pay off your debts in full, consistently chipping away at your account balances is a smart and effective way to clearing your debt.
You can implement the following credit card debt reduction methods to help you out:
- The Debt Snowball: Write down your credit card balances from highest to lowest. Make the minimum payment on each account. Then, direct all of your extra funds on the card with the lowest balance until you pay it off in full and move onto the card with the next lowest balance. Rinse and repeat the process.This method is suitable for those who have several outstanding balances on multiple credit cards but can’t qualify for a new balance transfer or low-interest personal loan to consolidate credit card debts.
- The Debt Avalanche: List your credit card debt based upon the interest rate of each account—from highest to lowest. Make the minimum payment on every card. From there, apply any extra funds toward the account with the highest interest rate until you pay it in full. Then, repeat the process.This method will help you pay less in interest and will dig you out of debt faster. The plus point- you will have the satisfaction of seeing the highest interest rate debt gone first.
2. Credit Card Balance Transfer
A credit card balance transfer involves transferring your current outstanding credit card debt to a new credit card which offers either a lower or even 0% interest rate, in which case helping you to save more by paying less interest.
Many banks usually balance transfer over a time frame between 6, 9, 12 or 36 months for repayments. However, you should bear in mind that you might not get 0% interest rate if you go for longer repayment time frame such as 36 months, still it will have relatively lower interest rate than the original interest rates on your previous credit card.
A word of caution here, don’t use your newly available credit to rack up more debt.
3. Take Out a Personal Loan
If you have a job with a steady stream of income and a good credit score, you may consider to apply for a personal loan to get rid all your credit card debts. Personal loan will not only help you to reduce the number of monthly repayments, allow you to manage your debts more easily but its interest rates are often lower than credit card interest rates.
For those who have less than stellar credit score, you can opt for personal loans offered by licensed money lenders.
4. Cut Spending and Expenses
People go into credit card debts for many different reasons but the single biggest reason of them all is to keep up with lifestyle choices and raise living standards.
If you have to spend money on credit cards for necessary expenditures, such as everyday expenses and medical bills, it’s important not to beat yourself up – stay calm and formulate a plan to pay them off. You can find ways to lower your monthly expenses and reduce your spending habits to help you alleviate existing credit card debts and avoid new ones. Some of the ways you can save money by spending less on:
- Dining Out
- Online Shopping
- Grooming Services (Nail Salon, Barber, and Hair Salon)
- Home Entertainment (Subscription Services)
The Bottom Line
If you can’t get yourself out of credit card debts, you may have to declare bankruptcy, which can damage your credit score and make you disqualify for loans or credit for years. Nonetheless, there’s still a sliver of light at the end of this debt tunnel. By following the strategies we’ve outlined here, you may be able to walk out of this debt tunnel.
The journey might not be quick or easy, but many people who succeed at clearing out their credit card debts say the feeling of relief once they become debt-free is worth the effort.
Want to know if you’re eligible for a personal loan to consolidate your credit card debts? Talk to our advisor to find out more.
Avex Credit is a licensed money lender in Malaysia under the purview of the Ministry of Housing and Local Government and governed through Money Lenders Act 1951 and Money Lenders Act (Amended) 2003. We provide a variety of personal, mortgage and business loans that are tailored to meet your specific needs.