Living on credit may not always be a bad thing, especially if it’s well managed and contributes to growing your assets. But unmanaged debt can easily creep in and become a norm we are so used to that we easily add to it with uncontrollable spending.
Ironically, we’re often trying to live a life with financial freedom but it starts to seem unattainable with the huge debt in our names.
The first step isn’t to get into more bad debt by investing. There’s honestly no point in investing to yield 5-10% return per year through sustainable investment tools when your interest charges are at 20% each year. It’s wiser to pick up some small and yet powerful habits that can help get rid of your debt consistently.
Here are some tips to becoming (bad) debt-free!
1. Step-down interest
Start with the debts that have a higher interest, and work down the interest ladder. This allows you to incrementally reduce the interest you’re paying overtime.
Always start with paying off credit card debts because they often have the highest interest rates, then work your way down to balance transfer, personal loans, student loans, motor loans, and mortgage loans.
If your credit card loan is more than 6 months of your salary, it might be better to look into debt consolidation first (refer to tip 5).
2. Sort by small to large
If the interest rates of your debts are similar then you can look to clear out the smaller debts first if you want to stay motivated and see the evidence of your debt reducing significantly. Nothing feels better than to strike off a creditor from your list.
Devote more of your cash towards paying off the smallest debt ASAP while making minimum payments on others. This may not make the most financial sense but it’s proven to be a very motivating and empowering way of managing debts better.
3. Minimum repayment is road to hell
Don’t just make the minimum repayment. Especially in the case of credit card debts, the minimum payment only pays the interest, it doesn’t actually reduce your debt.
This is why some people feel that their loans aren’t shrinking despite making the minimum repayments over a few years. Even if you’re only able to pay a little bit more than the minimum, do it! Every little bit will add up in the long run and help you to clear your debt.
For larger loans like mortgage loans, some clauses may not allow you to make extra payments on top of your stated monthly repayments during the lock in periods (usually the first 2-3 years). If that happens, you can consider keeping the money aside, and making a larger repayment after the loan lock in period is over.
4. Read letters from your banks carefully
Read your bills and bank notices. It’s tempting to want to throw them out without reading them properly but these notices can actually be helpful. Banks often increase interest rates once the loan is out of its lock in period for a fixed mortgage loan. Though they send letters to inform us before that happens, most of us might miss out on reading them.
Set a calendar reminder on the day that you start your loan to keep note of the end of this lock in period so that you can check on rates and your repayment amounts. Then what do you do? Look for better interest rates and deals elsewhere.
You could also use an expense tracking app (planner bee) which will send you an alert whenever it detects a change in your regular repayment amounts. Be aware of the interest rates you are paying for as most interest rates go sky high as soon as the lock in periods are up. But of course, before you move your loans to other banks, be sure to consider the entire cost involved too.
5. If all else fails
Finally, if your debts are high and clearing them feels simply impossible, you can consider consolidating all your debts into a lower and fixed interest loan scheme. Some banks offer a loan consolidation service, where they review all of your outstanding credit and work out a monthly repayment plan for you over a fixed tenure.
This reduces your credit card debt interest rates from 20% p.a. to something about 5% p.a. However this option is only applicable if you are still employed.