Do you have credit card debt?
If you have credit card debt, one of the best gifts you can give yourself is to pay your credit card aggressively. Paying high-interest debt is actually a very good investment strategy, sometimes “earning” you more than 50%
It isn’t enough to just pay the “Minimum Amount Due” every month. Create a payment plan, put it in writing, and attack your credit cards, starting with the highest interest credit card first. If the cards have the same interest rate, choose the one with the lowest balance.
Aggressively pay your credit cards starting with the card with highest interest rate.
What happens if you just pay minimum? Let’s take a look. Suppose
- you have credit card debt of P20,000 in one credit card
- you do not add any more debt to that one credit card
- your monthly interest rate is 3.5% and
- you normally pay only the minimum P500 per month for this card
- you keep your other credit card payments constant
Paying only the Minimum Amount Due will often increase your debt
After the first month, your P20,000 debt incurs 3.5% interest or P 700, and you pay P 500 only, so your ending balance is P 200 higher at P20,200. After 12 months, you would have paid P 6,000, but incurred P 8,920.39 in interests! Hence your ending balance after 12 months is higher at P22,920.39. Your debt and P 6,000 payment actually lost you P 2,920.39 or 49% loss!
But what if you decided to save an additional P10 per day or P300 per month to add to your credit card payments. That isn’t much, right? Instead of paying the minimum P500, you pay P800.
Paying more than minimum, at least more than monthly interest, will reduce your credit card balance.
Because you are paying P800, or more than the interest (3.5% of balance), your debt actually shrinks every month. Specifically, your P20,000 debt will shrink to P18,539.80 in 12 months. This means your twelve P800 payments totalling P9,600 earned P20,000 minus P18,539.80 equals P1,460.20 or about 14.6%* !!!
But what if, when you get your 13th month pay, you use part of it to make a large payment on your credit card debt? What if, after deciding to save an extra P10 a day or P300 a month, you paid P7,500 on the first month?
Making a balloon payment reduces the interest rate
The balloon payment of P7,500 substantially paid the balance of your P20,000 debt, so after the P700 interest, first month ending balance is P13,200. Hence subsequent interest per month dropped initially to P450 then lower every month.
So your debt shrinks faster every month, up to P8,758 after 12 months! This means your P7,500 plus P800 every month totaling P16,300 earned P20,000 minus P8,758 equals P11,242 or about 69%* !!!
But let us make a real plan. Can you save P33/day instead of P10/day? The P23 difference is about the price of a cup of coffee at the cafeteria, or that modest ‘turon’ after lunch. That translates P1,000 per month. What if, in addition to your P7,500 on the first month, you add the P1,000 to the original P500, and pay P1,500 per month?
Aggressively paying your credit card debt will enable you to quickly retire your debt
Wow! Is this for real? The P7,500 initial payment reduced the balance to P12,500 plus P700 interest increased the first month end-balance to P13,200. But the aggressive repayment at P1,500 per month very quickly reduced the balance to P1,022.81 after the 11th month, enabling you to fully retire the P20,000 debt after only 12 months!
Just think about this. Your P23,558.61 in payments earned you enough to fully retire one credit card with P20,000 beginning balance. That is like earning P20,000 on P23,558.61 in one year or 85%! Where can you find an investment that gives you 85% in a year?
After 12 months, it is time for your 13th month pay again. Time to start retiring your second credit card or next P20,000 debt. It will be easier for the second card. If you were paying minimum of P500 on your second credit card, you can then pay P1,500 more ( what you were paying for the first credit card ).
Pay high-interest debts! It is one of the best investments you can make!
* Strictly speaking, the effective interest rate is the same as the credit card rate, approximately 3.5% per month, or a compounded annual rate of approximately 51%.
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