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Debt repayment strategies

Question: I am embarrassed to admit it; my credit card debts ballooned during the enhanced community quarantine. Now I can only pay the minimum amounts required by the credit cards. I am afraid that if I just pay the minimum amounts, I will end up paying my card balances for many, many years. Is there a better way? Asked at “Ask a Friend, Ask Efren” FREE service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook.Answer: There are currently two methods put forth by financial planners in getting rid of credit card debt fast. These are the snowball method and, for lack of a better name, the interest monster method.

Firstly, both methods assume that you will pay a fixed amount every month. That fixed amount will be the sum total of all the initial minimum payments on your credit cards. Secondly, you will be able to raise additional cash in the form of getting a side job and/or cutting back on your expenses. The additional cash will go toward the repayment of any of your credit card debts. Thirdly, the credit cards will not be used again. And if ever a credit card is used, the amount charged will be fully paid, in addition to the minimum payment for that credit card, on the following payment due date.

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For the snowball method, the first step is to use the additional cash to add to the minimum payment on the credit card with the smallest outstanding balance regardless of interest rate being charged. The goal is to finish paying one credit card quickly to get a psychological win, that of having one less credit card to pay and one date in the month freed up from being a payment due date.Once a credit card is fully paid, the total periodic amount previously paid (i.e., freed up cash) to that credit card will now be added toward the payment of the credit card with the next smaller outstanding balance. This process is repeated until all credit cards are fully paid.

However, our simulations have shown that it would cost less, in terms of interest charges, to increase payments in the credit card that charges the highest interest. And just like with the snowball method, the freed up cash from paying off a credit card will be used to pay that credit card with the next highest peso interest charge. This is the stuff of the interest monster method where the goal is to get psychological wins every month by chopping away at total peso interest, which is the real monster, and not just chipping away at the number of credit cards and due dates, which are but the minions.

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But please note that both methods make one especially important assumption, that you can raise additional cash by getting a side job and /or by cutting back on your expenses. Many times, raising that additional cash is exceedingly difficult because getting a side job may only make you less focused on your main source of income. And you are probably already living on a bare bones budget given that you can now just afford to pay the minimums on your credit cards.

The alternative way is the EnRich GOOD (i.e., Getting Out of Debt) method. Like with the other two methods, just start with the sum total of the minimum payments and stick with paying that total minimum amount monthly. It will take a bit longer to fully pay all your credit cards. But you will not have to incur additional stress from raising cash through a side job or further cost cutting. And just like with the interest monster method, any freed up cash from paying off a credit card will be used to pay the credit card with the next highest peso interest charge.

At the end of the day, you will need to choose that method with which you will feel comfortable. But at least now you have a choice. INQ

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