a Goliath credit limit against your David paycheck.

a friend of mine asked me a few days back if i could please ask a common acquaintance of us if he has surplus cash he can lend to her for 8 months (with interest of course). she learnt from me that he was investing some of his surplus cash to individuals at a rate which is lower than the bank’s lending rate but definitely higher than the bank’s savings rate.

i wondered for a moment why she didn’t ask me if i have surplus cash. i loaned cash to her in the past when she had emergencies. “what do you need it for?” i asked.

“i am paying too much interest on my credit card balance because i’m not paying everything.” she said.

ahhhhh. that is why.

she knew me well enough to know what instances i would loan someone money. and it’s always only for emergencies. that is what makes me comfortable and that is how i set the rules. an acquaintance of mine once ask me if i can loan him Php20k because he wanted to buy one of those surplus cars (i heard they are really cheap) and needed money for downpayment. i was quite proud of him that he was being honest (some people would probably not say where they are really going to use the money) but i didn’t give him the cash. i know by the manner of how he spends his salary, he wouldn’t have enough for the amortization of his car loan, anyway.

i told this friend of mine to ask him directly but warns her that he only “invest” his money on individuals who only have cash timing issues (e.g. people who didn’t have the money now but will have it for sure in the next month or so) and that, he might not be so keen on withdrawing his cash from his current investment and loan it to her for a higher rate.

“how did you end up with unmanageable credit card bills anyway?” i asked her, remembering that her credit limit wasn’t that big a year ago. “don’t you have a comfortable credit limit?”

“they increase it to Php65k.” she answered, laughing. “and i used all of it and can’t pay it in full.”

now, she is only taking home Php17k every month. and 30% of this goes straight to repayment of her outstanding bank loan she got since two years ago. deduct rental and utilities expenses, and daily expenses (such as transporation and meals and stuff), there is barely anything left. in fact, she doesn’t have any savings at this point. and so, any credit card mismanagement will surely bring her finances through the roof.

the worse thing is that, any minimal payments she can make to her credit card, she used the available credit limit again for purchases. thus, not only is she incurring interest on her old balance, she is also paying interest on the new ones.

“you should downgrade your credit limit to something you believe can be very manageable.” i told her. she said she has plans to have it deactivated sometime in the future.

ahhh, don’t we all?

the problem though is that the bank will not let you deactivate your card unless you pay off the balance. and if you happen to have an installment payable, you will be charged for preterminating it before the end of the installment term. this is one case where paying in advance will cost you more.

pretty smart, huh?

i asked her to tell me honestly if she would not be tempted to use her credit card again when the ~Php65k outstanding balance is wiped out by another loan. she told me she isn’t really sure but she will give it a try. i also ask her where she will raise the Php65k + interest that will be due in 8 months if she get to secure a loan (seeing as the 8th month from now is August- which is a ghost month which is notoriously known as the month where most employees are always running out of money). she answered she will set aside money from her paycheck, plus she is hoping for a bonus middle of next year which will hopefully cover a part of the Php50k. the 13th month pay she will receive this month is good as spent already, so we didn’t even bother touching that.

telling her what she should have done to avoid where she is right now is useless at this point. it already happened as she is already a slave to the infamous 39% p.a. interest on credit card debts.

so, what is she to do?

a. cut the credit card in half. seriously. this way, she wouldn’t have to be tempted to use any available credit limit to buy groceries or a pair of shoes until she gets the balance down.

b. take advantage of available loan programs that charges lower interest rates and arrange repayments through automatic payroll deductions (such as SSS and Cooperative Loans; they usually charge 8% to 10.5% p.a.).

c. revisit spending habits. although she runs a very simple lifestyle, she has become too careless with the purchases she bought in credit that when the bill comes, she doesn’t have enough money to cover it. she needs to list down her monthly expenses and see where she can find cost cutting opportunities. believe me, there will always be opportunities.

lastly,

d. learn a lesson from this. sometimes, a good lot of us need to get smacked hard to snap out of the mess we are in. and rightfully so. there’s nothing like experience to make us wiser and say “never again” and actually mean it.

it took me a year and a half to clear myself out of my debts. and it was one hell of an experience. there were a lot of things i have to give up which made me miserable at first. but on another hand, it made me work smarter (if not harder), an act that was not lost with the management of my previous company which earned me considerable bonuses and pay raises.

i can say luck may have something to do with it. but luck only comes to those who are quick enough to notice it for what it is and grab the chance to exploit such.

i told her when she gets around cutting her credit card in half (that is always the hardest part), then we will talk.

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