Tuesday, June 25, 2013

Credit card debt Should you settle it immediately if you can?

SO you’ve got credit card debt. A lot of it. But let’s just say that suddenly, you have the means to settle it. Perhaps you won the lottery, or will be receiving a windfall of cash.

So the question is, now that you have the means, should you settle off your debt immediately – or pay it off slowly (like how you were going to initially) and use the money for something else?

The right thing to do
Instead of paying off your credit card debt, perhaps you feel that the money should actually be put to better use – like investment. But is this the right thing to do?

MyFP Services SdnBhd managing director Robert Foo says the right thing to do is to settle your credit card debt immediately.

“Where ever you allocate your money, the chances of you getting 18% per annum in returns, which is the interest rate for a credit card – is unlikely,” he tells StarBizWeek.

Success Concepts Life Planners vice-president Lee Mun Wai concurs.
“Money coming in should be used to settle your credit card debt, unless you can get returns that can generate returns as high as that (the annual interest rate of credit cards).

“But even if you can find something that gives that kind of returns, chances are that the investment could be extremely risky,” he says.

Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui also believes that settling your credit card debts should be a high priority.

“Right after debts that you owe to Ah Longs, your credit card should be the next thing that you need to settle immediately,” he enthuses.

“Immediately after that, in terms of priority, you need to settle your mortgage and personal loans,” says Yap.

Jessica Wong, who claims to use her credit card for “a lot of things,” says she makes it a point to settle her credit card bills as soon as possible.

“I try not to have it accumulate because the interest rates are really high. I had a huge bill at one point but after that decided to be more frugal with my spending habits.”

If you choose not to settle that debt
Of course, choosing not to settle your credit card debt means incurring high interest rates that you could and should avoid. But if you’re not going to clear your outstanding payments, what’s the next best thing to do with the money?

“From a motive point of view, a person could have other things to look forward to,” says Foo.
“He could have other income or opportunities coming in. If not, then it would be advisable to clear that debt.”

Foo says the important thing to determine is whether the sum owing is “insurmountable.”
“Ask yourself if the debt is insurmountable. If you have plans of setting up a business, then perhaps the best thing to do is to channel the money towards that.”

Foo adds that what amounts to “insurmountable” would depend on an individual’s goals and objectives.

“It depends. RM10,000 might be nothing to some people but for some, it’s a terrible debt to have.”
Jacob Chong, a self-employed businessman, says he was “neck-deep” in credit card debt when he took out a personal loan to set up a catering business.

“I was paying off the minimum sum every month, then took out a loan to use as capital for my business. It was a risky thing to do but I was confident that I would be able to see my business take of.

“We were off to a slow start but finally we were able to break even, and I did end up clearing my credit card debt with the money I was making through my business,” he says