8 August 2007

Fixing your Money Problems - 9

Part 9: (Paying off Loans & Credit Card)

If you already have loan and credit card debt, pay-day might be both a blessing and a curse. It always feels good to have your salary credited to your account, but looking at all the deductions and money you have to pay for your debts, just makes your salary seem like it wasn't worth it!

Now, when it's time to pay off those debts, you need to prioritise; some people have a number of credit cards, and more than one loan. For banks, time = money, which is the concept of interest; so the sooner you pay off your debts, the less money you're going to end up being charged for overall.

How do you prioritise? Well, your most important goal here is to know as much as you can about your debts. Most people take on debt without knowing the specifics of each loan, credit card, etc. Unfortunately, the sales people at our banks aren't obliged to tell the customer these details; the information they seem to best divulge is how much money you get, and what you pay per month. All other details get lost in the sale.

First thing you're going to need to know is how much interest you are being charged. Interest rates vary from bank to bank; some mention a flat rate, some mention a variable rate etc, and this rate is calculated differently; so when one bank says, we charge you 2% on your credit card, another bank says were charging 8% on your loan, and another mentions 5% on a loan, in reality, the cheapest interest might actually be the 8% (the 5% is calculated on a flat basis, and the 2% calculated monthly, so they end up higher than the 8% rate).

Without going too much into detail about the specific calculations of interest rates, you need to get a standard interest rate calculation so you can compare between different banks. This is usually called an APR. Just ask for this rate; banks have to give it to you if you ask for it, and it's basically a uniform calculation including all charges and costs.

Anyhow; figure out what each of your loans/credit cards are costing you in interest per month, and aim to pay off the highest charging ones first. In almost all cases, your credit card will end up costing you the most, so you need to dedicate as much money to paying that off.

Credit cards charge you a minimum balance which is usually 5% or 10% of the outstanding amount. To really make a difference, try to at least pay double that. Sure, you might have less spending money that month, but the sooner you get rid of your credit cards, the quicker you're going to be able to start living a beautiful debt free life again. Make sure you pay on or before the due date every month, because late payment charges are usually reasonably high. Also, DO NOT USE the credit cards after you pay them off. If you really can't handle the temptation, hide them somewhere at home, or get a pair of scissors and cut them up.

Second; paying off your loans. Loans are structured payments; the bank has already made a plan on how they will take back their money with interest, and they're not usually willing to change that for you unless they make you pay extra fees first. You can't go in to most banks and tell them "I have an extra 100BD in my account, please use that to deduct part of the loan". What you're going to need to do is save up enough money and pay off the loan all at once.

First you will need to find out the basis on which your bank is charging you interest, and if any of it will get deducted for early payment. Say you take a 7-year loan; for some banks, if you pay it off after 3 years, you're only going to be charged interest for those 3 years, and the remaining period interest will get deducted. Other banks might not; they might charge you the interest for the full period regardless of whether you pay it off early or not. In the second case you're pretty much screwed whether you pay the loan now or later, but in both cases you're going to need to find out how your bank works. Information is what's important here, get as much of it as possible in order to make your decisions.

Again, like I mentioned in previous posts, PAY OFF YOUR DEBTS FIRST! Do not go out and spend money on shopping, etc, and then decide to pay off debt with whatever is left, because by then you probably won't have much, and your debts will increase and your interest will increase with then. Debt can turn into a monster if you don't control it the right way. I know the issue of debt is usually very difficult for most people to deal with, so again, if you need any direct help with your specific issue, you can shoot me a message and we can talk about clearing up your personal situation.


Mahmood Al-Yousif said...

Good post, I hope you will cover "personal credit rating" in a future post.

I don't think it's a good idea to not use the cards again once you've paid them; what one should do is do use them but control the amount of spending as you would in anything else. It is better - and safer - to carry and use credit cards rather than cash, I think. So it would make sense to use them, in fact, as the method of your usage actually affects your credit rating, as that has started happening in Bahrain, it is best to use them instead of cash but make very sure that you pay the full amount by the date it's due. That drives the credit card companies crazy and gives you an immense sense of achievement too!

Ammaro said...

That is true to a certain extent. However, this advice is mostly for those that find a credit card in their wallet too much temptation.

I mentioned that credit cards are actually pretty useful in a previous post; but only if you know how to control spending with them. Most of the advice here is pretty basic, but we'll build up knowledge as we go along, and hopefully future posts will deal with credit ratings, etc as we go on.

Mahmood Al-Yousif said...

Oh I agree, that wasn't a negative comment, but another way of looking at it. I am the father of the impulse buyers and I have ample proof of that fact!

But "responsible" use of the card is much better than carrying needless cash with you everywhere. That is especially true outside of Bahrain - only if the bloody local issuers would put a good transfer rate we would be much better served and much better encouraged to use it, but slapping on a dollar rate - for example - of .38 or even .39 is not a nice joke.

I'm certainly not even smiling!

Unknown said...

Hi there Ammar may Allah bless on your effort :D

when thing can you explain more in detail about APR coz I want to know more about it ;)

and for you mr. Mahamood for me these days im usingmy atm card to purchase and pay bill coz if I withdraw cash ill end up spending it all on AIR ;) so with ATM cards I pay the exact amount and change stays at the bank..

Ammaro said...


APR is a simple calculation which gives you a number to compare between banks. For example, Bank A might give you a 2000 dinar loan, and charge you 10% interest per year, so your total cost after 1 year is around BD200. Bank B might give the same loan for 5% only, but charge you an application fee of 200 dinars, so your total cost actually ends up as BD310, even though they say their interest rate is lower. Also, some might charge a flat rate, some a variable decreasing rate, etc.

APR is a mandatory calculation all banks have to do, which includes the interest rate as well as any included charges, to give you one number to be able to compare between banks. Just ask for the APR rate when you go shopping for a loan, and compare it between different banks, so you can know which one really charges more than the other :) Hope this helps

NewMe said...
This comment has been removed by the author.
NewMe said...

thank you for the heads-up!
based on your expertise, which debts should i settle first "Credit Card or overdraft"?

Ammaro said...

preferably the one that charges you a higher interest rate/fees etc

if you can send me a msg with more details on the balance, interest etc, i can help you out more :)

NewMe said...

Visa 1900BHD
Overdraft 1000BHD
it is quite difficult to figure out the rates since they run them on different cycles! well this is what i was told?!

Ammaro said...

im sorry to say theyre giving you a load of crap, theres no way they cant calculate it.. snd me a msg and lets discuss this

NewMe said...

settle the over draft =)
it is almost double the interest regardless of the cycle length!
many thanks =)

Anonymous said...

I am so astonished so much reading this issue of saving and would like to apply what you are suggesting i have all the list of my expense and income but i can say I am approximately negative BD 3000 every month and I don't want to ask anybody a loan again. How to start with.... help

Anonymous said...

Now I'm lost!

Anonymous said...

I believe the morale answer to money problems lies with debt consolidation