Credit card debt has been an issue for decades, especially among Malaysians. According to a report from the Malaysian Department of Insolvency in December 2019, credit card debt made up 10% of bankruptcy cases from 2015 to 2019.
A 2015 survey from the Asian Institute of Finance revealed that 47% of Gen Y respondents aged between 20 and 33 were engaged in expensive credit card borrowings.
These days, spending future money is so easy with credit cards where a simple wave will do or shopping online for your favourite items and only worrying about paying it later.
Many people will continue to pile up debts and only make the minimum payment each month, making things worse. This leads to huge credit card debts that seem to last forever with no end in sight.
I have a friend that used an extreme method to manage her credit card debt – she physically cut her credit card into two and never owned a credit card again.
While not everyone will need to resort to such drastic measures, are there other ways to manage credit card debt?
For me, a credit card is still a very useful financial tool that allows us to make payment for big ticket items or for emergencies where we don’t carry much cash.
Steps to get out of credit card debt
1. Stop using your credit cards until you pay them off
Credit card balances can grow rapidly due to very high interest rates of 15% to 18% (or more)!
People often find themselves on a debt treadmill, struggling to make minimum payments and helplessly watch their principal balance grow each month.
Stop chasing your debt balances. Use cash or debit cards until your credit cards are paid off. In this way, you can focus on paying down your balances and you won’t be tempted to spend more than you can afford.
2. Get organised and prioritise
If your credit card debt is spread across several different banks, get organised and prioritise payments on the credit card with the highest interest rate.
Here’s a tip – the interest rate of local bank credit cards are usually cheaper than foreign banks. Review your total credit card statements and settle the debts one by one in order of interest.
3. Never pay the minimum amount
I found that many people are in the habit of paying the minimum 5% of their credit card statement each month.
Do you know that all your statements clearly highlight the disadvantage of paying the minimum each month? However, many still choose to ignore it.
You can refer to the table below. If your outstanding debts are RM10,000 and you only pay the minimum amount (RM500), then the repayment period will be 88 months.
However, if you pay a slightly higher amount (RM600), this repayment period shortens to just 20 months. Don’t ever underestimate the rate of compounding, especially when it comes to debt.
4. Credit card balance transfer plan
Do pay attention to promotions or offers from different banks or credit card companies. You may be able to transfer the existing balance on your current credit card to a new or unused credit card.
This can be used to consolidate the balance from multiple credit cards into a single credit card, making the debt much easier to manage. You also can take advantage of lower interest rates compared to your existing credit card interest rate, which means you’ll pay less in the long run.
5. Personal loans from banks
This works by making full use of the difference in interest rates between the loan and the credit card. Current personal loan rates can range from 5% to 8% depending on the bank and terms and conditions.
If you can get a personal loan at 5% per annum compared to 18% in credit card interest, then you can save up to 13% in interest. That’s a lot of savings!
6. Seek help from AKPK (Credit Counselling and Debt Management Agency)
Many Malaysians may not know this but AKPK can help you better manage your debt. They’re a good resource for those who are straddled with debt and are worried about being unable to pay it off.
AKPK will help you to develop a budget, explore options for getting out of debt, and provide you with a customised action plan. They can also help rebuild your credit and offer financial advice for free!
I’d like to highlight and repeat that AKPK is FREE. There are some scammers out there using the AKPK name to charge fees to desperate people in debt. Do be careful and always call AKPK directly.
7. Manage cash flow and spending habits
Do some budgeting and manage your cash flow every month. There are many apps that help you to track your expenses so you can understand your spending pattern and look for ways to reduce or cut irrelevant purchases.
For example, reduce the frequency of dining out or going to the cinema, and set a limit to online shopping time.
I’ve found that many young people have the habit of buying online everyday. They say “I’ll spend RM20 only” but that RM20 will add up to become RM600 each month.
Online shopping is a great temptation and while some may say that it releases stress, trust me that piling up debts is much more stressful – it’s just that the stress comes later!
After tracking your cash flow for a few months, you may find that your expenses always exceeds your income. If there’s really no way to reduce your spending, it means your income isn’t enough to sustain you.
Instead of spending your free time relaxing, you may consider using this time to find a part-time job or even start an online business. When your income increases, then you’ll be able to pay off your credit card debts and start leading a better life.
Let me borrow a phrase from Warren Buffet to make my point: “Don’t save what is left after spending; spend what is left after saving”.
I advocate this habit to all my clients by putting regular savings in unit trust so they can grow their money rather than complain that they’ll only save if they have money left after spending.
By saving than spending, you won’t overspend because you’ve already saved the relevant amount.
The saved amount will have many objectives such as emergency funds, retirement planning, etc, which means you won’t be using a credit card as your emergency fund and build up credit card debt.
About the Author
Andrea Siew is a financial advisor, approved and licensed by Bank Negara Malaysia and the Securities Commission Malaysia. She can be contacted at andreasiew@harveston.com.my
