There are two main reasons why an individual or family goes into heavy debt. Overspending and the lack of a financial safety net.

Overspending

Spending more than what you earn is the most common reason why people get into a personal debt crisis. The most efficient tool to overspend is the credit card. Next to “5-6,” unpaid credit card debt is the worst kind of debt due to its high interest rates. Because of the relative ease of getting a credit card, millions of Pinoys own one or more credit cards. Today, there are close to 6 million credit cards issued in the Philippines. Sadly, more than 600,000 individuals are delinquent and unable to pay their credit card debts.

Misusing your credit card will quickly get you into serious debt trouble because it allows you to spend money you haven’t earned yet. When you don’t feel the “pain” of parting ways with your hard, cold cash you won’t think twice about buying things even if you don’t need them. For reckless spenders, the opportunity to achieve instant gratification minus the instant drain on one’s pocket makes credit cards so convenient and attractive… and deviously dangerous.

Lack of a financial safety net

Even if you are a wise spender you can still get into a debt hole if you are caught unprepared when a financial crisis strikes. Serious sickness, accidents, untimely death or business failure is likely to hit your family within your lifetime. Just one of these unfortunate events can easily get you into serious debt if you haven’t taken steps to protect your family against the financial impact.

If you are experiencing a debt crisis now, here’s the main strategy to get out of it - “spend less money than you make!” Well, it’s really more difficult than it sounds. But it’s the only way for you to escape the grip of the debt monster. Without any money available to pay down your debt you will be under its mercy till kingdom come. Below are proven steps you can take to help you dig out of a debt hole and nurse your way back to financial health.

Change your lifestyle. This is probably the best strategy you can use to get out and stay out of debt. Yes, it will take a lot of determination to change your spending habits. But you will have to get down to the root of the problem. If your expensive lifestyle led you to this crisis in the first place, changing to a more modest way of life will remove a major cause of your financial troubles.

Create a spending & debt-repayment plan & follow-it. A spending plan or budget allows you to allocate your funds accordingly and will let you monitor your spending closely. Be sure to include in your budget an amount for paying your debt and prioritizing payment for the most expensive loans. Do everything to stick to your spending and debt-repayment plan. Suspend paying yourself first if you’re still paying down debt. It doesn’t make sense to put aside money to a savings account that only pays 1-3% interest annually while you are paying 10%-40% in loan interest.

Cut-up the other credit cards. The more credit cards you have, the more tempting it will be to overspend. You only need one, at most two, credit cards. Choose the card(s) with the most favorable terms (lowest interest rates, penalties and annual fees). Transfer the balances of your other credit cards to the card(s) you will retain.

Avoid new borrowings while you are trying to bring down your debt to a more manageable level. While it’s okay to borrow low-interest money to pay for an existing high-interest loan a much better strategy is to cut down your expenses and use the money saved to pay your debt. Remember to borrow money only for buying “essential” things.

Pay in cash and you will be spending 30% less. Many card users mistakenly think that a credit card is a source of “additional” money which makes it easier for them to overspend. By paying cash all the time, or at least most of the time, you will keep your expenses down because you stop spending when there’s no more money to take out of your wallet. If you have to use your credit card, try to pay off the whole amount every month so you don’t pay interest charges.

Pay more than the minimum to reduce your credit card debt faster. The longer it takes you to repay, the more you will end-up paying. A credit card balance of P50,000 will take more than ten years to wipe out if you just pay the minimum every month; and you will have paid more than P85,000 in interest charges alone.

Pay on time to avoid costly penalty charges. It’s necessary for you to keep a written reminder of your payment due dates especially if you have multiple loans to pay. Put it in a place where you see it everyday and for good measure use your cellphone’s calendar & alarm functions for a timely reminder.

Get yourself insured. An unfortunate incident that will give a serious whack to your finances can happen anytime; it can happen tomorrow. So get your most important assets insured now; this includes you, your family and your properties. You will need life insurance, medical/hospitalization plan, car insurance and real property insurance. If you run a business get it insured. Make sure you don’t let the insurance agents dictate how much insurance you should get. Take an insurance plan that you can comfortably pay even if it means being under-insured. Under is better than nothing.

Use other sources to pay your debt. Look around for other sources of funds that will help you pay off your loans and other borrowings. Read the article ‘where to find money to pay your debt” for ideas on how to pay off your debt faster.

It cannot be overemphasized that the only way for you to get out of a debt hole is to live beneath your means. You don’t have to be a reckless spender or engage in spending binges to get into a debt crisis. Consistently spending even just a little more than what you earn will soon get you into trouble. Be very careful in using your credit card and taking out loans to buy things that are not necessary.

Last update: February 14, 2008
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