Financial Blog

So you spent a little too much. Tuition fees, medical bills, holiday shopping—your expenses suddenly caught up with you. Now you’re either stretched to pay the minimum balance or you can’t pay anything at all. What now?

No matter what, make sure your account doesn’t go more than 90 days past due. Why 90 days? Because after 90 days there will be a permanent negative record on your credit file (that all banks have access to). After 90 days, even if you “clear your record” by paying off your bill, banks will be very hesitant to loan you money. Worst case scenario is that you would have to live by cash for the rest of your life. Thinking of buying a house or a car someday? Then start saving for it now because chances are, you won’t be able to get a loan from any bank.

But that doesn’t mean that you can wait until 90 days and get off scot-free. The moment your account goes past due, your credit score begins to drop. Aside from that, late repayments are also slapped with penalty fees that can range from 4% to 7% of your total amount due, depending on your bank. Add this to the 2.5% to 3.75% compounding interest you’ll incur per month and you’ll be bleeding out an extra 6.5% to 10.5% on top of your remaining balance each time you pay late.

You have the option to pay in minimum. Before they issue your card, banks have already made sure that you’ll be able to settle the minimum payment, which is roughly 1% to 5% of your bill. Let’s say you have a balance of P10, 000 on your credit card right now. You can pay as little as P100 to P500 only.

So should you pay minimum due? Not exactly. If you pay only the minimum amount, the remaining balance will be carried over to the next billing cycle. In this case, if you paid P500, you still have an outstanding amount due of P9, 500 PLUS interest on the remaining balance. In other words, the more minimum payments you make, the higher your total payment will be in the future.

So what should you do? Prepare yourself for the months ahead and avoid using your credit card until you’re confident that you’ll be able to settle the remainder of the debt. Figure out how much you can afford to pay per month and call your bank to see if you can move to an instalment plan or a balance transfer.

Another option is to get a balance transfer. It’s the process of transferring existing debt from a current card to a new credit card to get lower interest rates while paying off a debt. It simply means that your new credit card issuer agrees to pay the debt obligation you have with the original lender on your behalf. The balance is then transferred to your new credit card—only this time with a lower interest rate.

To know more about Balance Transfers, read: The What, Why, and How of Balance Transfers

Balance transfer terms can range from 3 to 24 months, with interest rates as lows as 1.91% that are way lower than most credit card’s 3.5%.

Muster enough courage to negotiate with the bank for a restructuring as soon as you realize that you won’t be able to pay your debt. By providing the bank with proof that you can actually repay your debt, they can give you a chance to pay it over a long period in instalments—usually ranging from 12 to 60 months. Keep in mind that banks would be more than willing to negotiate rather than having their clients default on their debt.

The benefits of using credit cards far outweigh the risks but ease of spending can also trap you in a debt cycle that will slowly bleed you out. If you find yourself in a sticky debt situation, the best thing you can do is to weigh your options while considering your available resources, then decide on an appropriate course of action. Don’t panic, always operate on good faith, and always be honest about your financial situation.

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