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.
8 August 2007
Part 9: (Paying off Loans & Credit Card)