Advice for Credit Card Debt Reduction

There are many credit card holders who have found success in finding their way out of loans. Some can find their way out by themselves and some use the help and advice from debt reduction companies, otherwise known as debt settlement firms. If you have borrowed a huge amount in the form of loans then you can find the following debt reduction advice helpful.

If you have outstanding credit card debt and are trying to find solutions on how to pay off your credit card debts, there are a few popular method and strategies to it. Sometimes it may be difficult when you're facing agressive creditors and collection agencies.

1) Snowball Method - List your debts from the lowest balance to the highest balance, pay the minimum on all your debt and divert all extra payments towards the lowest debt balance. This method is a moral booster although not the best, dollar wise. Keep repeating the strategy until your debts are paid off.

2)Avalanche Method - List your debts from the highest rate to the highest rate, pay the minimum on all your debt and divert all extra payments towards the debt that has the highest interest. Keep repeating the strategy until your debts are paid off. This is the best method that will ensure that you pay the least amount of interest over time. Although not as morale boosting as the Snowball Method.

3) Debt settlement programs - their target client are people who have debts over $10,000. An option if you're struggling with agressive creditors and lenders and just can't find your way out. They have experience negotiating with creditors for cheaper interest rates or to reduce the balance of your loan. Although there will be fees that probably apply.

4) Debt consolidation loans - Involves taking out a personal loan or organising a line of credit loan against your mortgage and using it to pay off your various creditors and lenders in one go. This enables you to refinance all the various loans into one, simple loan and usually at a lower interest rate.

5) Rolling the various loans into your mortgage via refinancing - This is always the best, however not always feasible for everyone. It's not feasible for you if you have no equity in your mortgage, if you don't have a mortgage or if your house is underwater (your mortgage balance is more than what your house is worth). If you have equity in your property, you can refinance your various loans into the mortgage and this will be amongst the cheapest form of financing. You have to ensure that if you utilise this option, you need to maintain your current payment so that you don't stretch out your debt for 25-30years. If you don't, then you'll discover that in 30 years time, you will still be paying for the dinner that you charged onto your credit card!

Negotiate with your creditors and lenders

Sort out all your bills and debts before you try any of the steps above. Call each of the creditors and see if you can arrange a payment option with them. If it's a small bill, see if you can get your creditor to reduce the bill with the condition that you can settle the bill immediately if they can assist by reducing the amount.

How you can erode your debts faster? Make extra repayments using the Snowball or the Avalanche Methods and always negotiate with your creditors. Keep them in the loop.

Understanding Credit Card Charges

If you buy $2000 worth on your credit card and don't pay that $2000 off by the due date, then you will be charged interest on the entire balance - even if you made a partial repayment of $1999.

If you pay the bill late, then most credit card companies will charge interest back to the purchase date (back dating interest).

If your bill is overdue, then most will cancel your interest free days until the overdue balance is paid completely.

Some credit card companies will charge interest on the entire balance even if you've paid a portion of your bill (even the new transactions that hasn't been billed to the statement yet). So until you pay your credit card statement in it's entirety, you will be charged interest even on the portion that you have partly paid off. And lose the interest free days on all the new transactions until the entire statement balance is paid off. This is entirely unfair but this is how they operate.

Balance transfer deals involves transferring your debt from one credit card provider to a new one who might be offering six months interest free deal. When the special period ends (in this example, it's six months) and there is a transfer balance remaining, the interest will be charged on that balance as if it was a cash advance. Cash advance rates are usually much higher than transaction rates.

If you find that you have overlooked the bill and paid it 1-2 days late (or even up to 1 week late) by accident and you have a good payment history, phone your card provider to explain and request them (very politely of course) to reverse the late fees and interest charges as a courtesy to you. They will usually reverse it for you if you have a good reason or you have a good payment history. It is usually left to the discretion of the staff member that is working which is why it pays to be polite when calling them to reverse any charges and fees.

If that doesn't motivate you to pay off the credit card statement in full, then you shouldn't be using a credit card. Not when it's costing you 10-28% extra in terms of interest charges.

Understanding loans and their features

Loans can have a fixed or variable rate of interest, be secured or unsecured, negotiable interest rates and payment terms. There are many different types of loan available.

Fixed or Variable Interest
1) Fixed Interest – Interest is fixed for the duration of the loan, from the time it’s taken out to the day you pay it off.

2) Variable Interest- The rate changes either up or down depending on the market rate (which varies depending on the loan type eg: LIBOR, Bond, Central Bank rates).

Secured or Unsecured
1) Secured – Then lender can sell whatever asset you’ve secured the loan against if you default and can’t pay the loan. Assets typically used as security are houses, cars, stock portfolios and personal possessions. Loans that are usually secured are car loans, mortgages, mortgage line of credit accounts

2) Unsecured- The lender has no recourse. You’ve got not asset with the lender as a collateral. If you default on the loan, the lender considers you a bad debt and will most likely pass you along to the debt collection agency as a last resort. This loan is riskier for lenders so they usually charge a higher interest rate because of this increased risk. Examples of unsecured loans are credit cards, store cards, personal loans and personal lines of credit

The different type of loans available are:

Car Loans
Car loans are usually secured against your vehicle. They may insist on car insurance as well. You should shop around for the best financing deal first before going shopping for a car because car yards will always have their own financing but this may not be the best deal around.

Car loans are usually for a fixed amount of money, organised upfront with a fixed interest rate, repayment amount and period. Example: $10,000 car loan at 10% interest, repayable by monthly instalments for the duration of 4 years.

Credit Cards
If you can’t pay off a credit card every month before the interest free period ends, then don’t use a credit card. If you don’t listen to this wise and sagacious advice, then it will ultimately be your downfall. You only need one or at the most two credit cards ever at any period of time.

These beasts come in various structures with interest free period ranging from 0 days or 55 days to 6 months typically. Read the fine print! Understand what you are signing up for. Don’t be fooled into thinking that it’s worth spending on the credit card because you get reward points or frequent flyer points. Wow, you’ve gone and spent $3,500 so that you can collect 3500 points, the equivalent of $25-$30 in rewards – if you can't pay that $3,500 off before incurring interest charges then it's a bargain with the devil.

If you can’t pay them off by the interest free period, you will be paying through the roof with rates ranging from 11% to a more typical rate such as 18% and 28% per annum interest. Usually the banks will have a 'minimum payment' amount of around $25 or $30. The problem with paying only the minimum amount is that you will end up paying interest on the balance owing and it will take you 25-40 years to pay off the credit card at the minimum amount that they request you to pay.

I will re-iterate myself because credit cards have been at the root of marital breakdowns, stress, tears and bankruptcies – if you can’t pay them off by the interest free period, don’t use them. Otherwise, you are best off looking at other financing options such as lines of credits or personal loans which charge lower rates of interest.

Debt Consolidation Loans
Debt consolidation is a process whereby you take out a new loan (or increase an existing loan) in order to close off several smaller, separate loans. This can be done by organising a new personal loan, refinancing your mortgage and rolling those debts into your mortgage or withdrawing equity out to pay off your multiple loans.

Why do people consolidate their debts? They consolidate in order to close off the loans with a higher interest rates onto a new loan with a lower interest rate. Credit card debts may be incurring interest at anything between 9% - 38% and by consolidating and refinancing, you replace the debt with a new debt with a lower rate such as 9%. It's also sometimes done to simplify repayments, instead of multiple payments to multiple loans, you make just one single payment for that new consolidated loan.

Margin Loans
Loans that are taken out usually to buy stocks and invest in portfolios. It can also be utilised when trading CFDs. The margin loan is usually secured by your stock portfolio and they will have different loan to valuation ratios (LVR) depending on what stock you buy. The average LVR could be up to a maximum of 70-80%, this varies depending on the lending institution but the higher the LVR, the more you expose yourself to margin calls.

I'll be writing a separate article regarding margin loans due to it's complexity and how it operates.

Mortgage Loans
Mortgage loans are used to buy residential and commercial properties. It's usually for an established amount (eg $380,000) with either a variable or fixed interest rate. Your loan contract will determine the period of the loan (eg: 25 years, 30 years or 40 years) and the monthly repayment amount, which may vary depending on the interest rate charged.

I will be writing articles about how to pay your mortgage off faster, amortisation schedules and techniques to pay your mortgage off faster.

Mortgage offset and redraw facilities
A mortgage offset account works by offsetting your mortgage balance by the amount in your offset account. The interest that is charged is on the net balance amount between these two accounts. To illustrate, assume Sally's mortgage on the 1st of March is $380,000. If Sally has $100,000 in her offset account, then the bank will charge Sally interest on only $280,000.

Lending institutions will usually not approve your loan without a deposit however, they may lend anything from a maximum of 80% to 105% of the property's value depending on your income and repayment abilities. The smaller your deposit and the greater your LVR, you may have to pay lenders mortgage insurance on your loan.

A redraw facility may be a component of your mortgage, depending on whether your mortgage loan has this facility or not (check your mortgage contract). With a redraw facility, if you make any extra repayments then you can withdraw the extra repayment anytime you wish.

Again, this is a complex area and I will write a full article dedicated to mortgage loans. If you don't understand the complexity of a mortgage loan then you will not know what features of the mortgage that you will need. Also, do you really want to be spending the next 30 years of your life paying off your mortgage? Understanding the finer points will allow you to establish the appropriate loan for your circumstance and be flexible enough to cater for your repayment ability.

Overdraft
An overdraft is usually an extension of your normal account, allowing you to have a negative balance. Businesses commonly have overdraft enabled on their account to cater for cash flow imbalances throughout the year. Some individual accounts has overdraft facilities enabled, but be sure to check if you are being penalised for the usage of this facility everytime your account drops below a $0 balance.

Payday Loans
Payday loans are the biggest rort ever. This has got to be the very last resort! The moment you start using payday loans, you are probably closer to insolvency and bankruptcy than you realise. If I could say which loan to avoid at all cost, it would be this one.

Personal Loans
These loans are either secured or unsecured. If the loan is secured, the rate will usually be lower than credit card rates and loans that are unsecured. They usually have a fixed interest rate and a set amount established at the beginning of the loan. The loan will have a payment schedule with fixed repayments, normally monthly, until the loan is paid off. You cannot vary a personal loan without creating a brand new personal loan.

Commonly used for buying cars, consolidating various loans, purchasing white goods, renovation, holidays and multitude of things. Normally classified as a bad debt and not used for investing but for aiding personal spending.

Revolving Line of Credit / Line of Credit Accounts
Similar to an oversized credit card, except they are usually secured. There is an established limit such as $100,000 and you can spend from the line of credit as much and as often as you wish until you have spent your limit – which is $100,000 in this example.

Monthly payments are based only on the component that you’ve used and may vary from a certain percentage to interest only. So if you have a $100,000 line of credit (LOC) and you’ve spent $50,000 on renovation, then you will usually have to pay the interest or minimum percentage on only that $50,000 that you’ve spent. Don’t fool yourself though. You will have to pay that $50,000 principal debt eventually, so be wise and spend only what you can afford.

Store card loans and credit
This basically covers vendor financing. It's where a retail store will offer you their store credit card (eg David Jones or Macy etc). Depending on the terms and conditions, these credit varies markedly. Some whitegood stores selling furniture, for example, may offer a 'buy now, interest free for 2 years' type of deal. If you don't pay the balance off before the interest becomes applicable then they commonly back date the interest charge to the very first date that you bought the goods.

It can be a very expensive lesson to learn. Be wise and if you can't afford to pay for it today, then don't buy it.

Student Loans
These differ from country to country. I’ll only be covering Australian student loans. In Australia they’re called HELP or FSS debts. Which is Higher Education Loan Programme debts.
I'll be writing about HELP debts in depth in a separate article due to it's complexity regarding the discounts that are applicable depending on how you pay the HELP debt.



There are so many type of loans out there. Basically everything and anything could be financed nowadays by the stores or by the shops. The terms and conditions of each loan differs and repayment structures also differ. If you don't understand the loan, don't borrow until you've done your due diligence and understand what you are signing up for.

Using the right type of loan for your spending needs

In a perfect world, you would save up the entire amount before you buy the item, buy the item on your credit card and then pay the credit card balance off before interest is incurred. So basically by your superb account management, you've picked up reward/frequent flyer points which translates to goods and holidays for free (excluding the annual credit card fee that you pay of course).

Unfortunately however, this does not work for many people because they don’t save up the amount before they rush off to buy on the credit card. So when the bills arrive, they scramble around trying to find the money to pay the bills because their income isn't sufficient to pay everything by the due date.

The most important thing I can ever write about how to utilize loans is to match the loan type to your needs. If it’s a long term need, don’t match it with a short term loan or else you’ll be penalized by paying higher interest than you would normally be paying if you had organized the correct loan type in the beginning.

Companies know this. They don’t use a credit card or overdraft to buy a company car, they use leases and car loan financing. They don’t use a credit card or overdraft to fund office renovations. They analyse whether they can afford to buy goods upfront. If they can’t and they really need to buy the goods, then they analyse what type of financing they need, find the best loan type and deal (financing) and then they go and buy the goods.

Most consumers lack this critical research and analysis stage. They want something and they go buy it immediately.

Ordinary folks get into all types of difficulties because of this lack of awareness. If you have no choice but to buy an item that you can’t pay off before the interest free period ends then you shouldn’t be using a credit card. You’re better off using a longer term loan such as a Personal Loan or a Line of Credit to fund your purchase.

DO NOT use a credit card to pay for it. DO NOT use a payday loan to pay for it. In other words, do not use short term loans to buy something that you can’t pay off in the short term. That will be the best advice you ever need regarding loans.