Due to the current COVID-19 pandemic, many borrowers are now struggling financially to pay off their credit card debt, home loan, car loan, and student loan. Learn how these 7 debt reduction strategies can help you get out of debt fast during this tough period.
Got some debt on your shoulders? It could be your credit card debt, housing loan, car loan, education loan, and a whole lot more. Well, you’re not the only one - most of us have some form of it, one way or another. It’s easy to fall into debt, but hard to get out of it.
From 2014 to 2018, stats from the Malaysian Department of Insolvency revealed that 95,000 people were declared bankrupt between 2014 and 2018 because they couldn’t honour their borrowings with lenders. Some of the main causes that dragged them down were personal loans (27.76%), car loans (24.73%), housing loans (14.09%), and credit card debt (9.91%).
Everyone wants to get out of debt fast, but the thing is, having to clear it off can be a long and arduous journey especially if you have multiple loans here and there. But what’s most important is that we manage our debt efficiently and consistently, because the last thing we want is to ruin our credit score.
Related: Ultimate Guide To Credit Scores
It’s even more important now than ever, especially in our post-MCO life. The sooner we clear off our debt, the easier it will be to face an uncertain future. As difficult as it may seem, there is a way to get out of debt (even on a low income, or even during this Covid-19 pandemic), but what’s more important is that you stay out of debt too.
Before we get into some debt repayment strategies, you need to do one very important thing first.
First, Do Your Budgeting And Set A Goal
By coming up with a proper budget, you can tell your money where you want it to go and keep track of how well you’re sticking to your plan. This will also be a great way to wake up to the amount of debt you have gathered over time. It will seem extremely discouraging at first, but the first step to a debt-free future is acknowledging the problem and planning out a realistic path to achieve it.
It’s easy to get lost if you’re juggling multiple loans at once, and this is why you need to first make a list of debts that you currently have, including your credit card debt, car loan debt, housing debt, education debt, personal loan debt… so on and so forth. From there, list down your income and expenses, and work out a schedule for you to pay your debt every month.
Budgeting can be discouraging but it is the most important part of your journey
It’s also crucial to set goals that work for you. One of the biggest mistakes in paying off debt is coming up with an over-ambitious target that only works on paper. If you’ve lived your life on poke bowls and lattes, telling yourself that you’ll switch to potatoes all-day-everyday will only leave you miserable. You may fall back to your usual spending habits in no time, leaving you disappointed and back in the cycle of debt all over again.
Weigh your income versus your debt, and consider other expenses so you can still live a relatively happy life during the course of your debt management.
7 Debt Reduction Strategies To Help You Get Out Of Debt Fast:
1. Consolidate all your debts into one
You may have multiple debts and loans with various interest rates and tenures. Some of them have high interest rates, some a lot lower. With so many variables, it can be hard to keep up with them.
Imagine if you could combine everything into one loan at a single interest rate. This, my friend, is called a debt consolidation loan. It may seem counterintuitive to get another loan to pay off your loans, but debt consolidation loans were made with the sole purpose to help borrowers get out of debt.
So, let’s say you have three credit cards with an interest rate of 15%, and each card has an outstanding of about RM5,000. To add to that, you have a personal loan worth RM50,000 which you’re using for your side hustle, and that has an interest rate of 7%.
You also have your car loan to account for, and your total debt to date may round up to RM200,000 or so. (And this will only grow if you don’t make the minimal payments to each one of your loans.)
With a debt consolidation loan, you’ll get to simplify this mess by combining all your debt into one. Think of it as the bank buying all your existing debt from other creditors, and in exchange, you repay that total amount to only one bank. Not only is this a lot easier to manage, but it can even save you money in the long run if one of your debts has a higher interest rate.
If you’d like to read more about debt consolidation, we’ve covered this extensively previously in this article. If you’d like, you can also browse through some of the debt consolidating loans and calculate which one would suit your current debt and repayment ability here.
2. Take advantage of balance transfers
This is kinda like a debt consolidation loan, only that this revolves around credit cards.
If you’re struggling to pay off your bills every month, you can combine all the debt from several credit cards onto one card. Again, yes, it may seem counterintuitive to sign up for yet another credit card, but the end goal here is to use this card as your “debt holding” card. (And may we suggest that you put your other cards aside after performing a balance transfer until you have full control of your finances.)
So… why do people do balance transfers? For one, you can take advantage of a lower interest rate. Plus, some banks even offer a 0% interest rate if you can pay off your debt within a short amount of time (e.g. 6-12 months)! However, other terms may apply depending on the card issuer (e.g. paying a one-time fee of 3% on the balance transfer amount).
Related: The Best Balance Transfer Plans in Malaysia
3. Use the Debt Snowball Method
We’ve watched enough movies to know how this works - a small snowball at the top of a mountain accumulates more snow as it rolls down. We can do the same with your money, but be prepared for an intense ride.
Like a snowball rolling down a mountain, this method will see your repayment sum growing bigger and bigger
We’ve previously covered this in another article, but in case you missed it, here’s an excerpt on how it works:
Let’s use the example of Ali who has to pay off his credit card debt (RM1,000, monthly repayment RM84), education loan (RM2500, monthly repayment RM105), and car loan (RM18,000, monthly repayment RM300):
- Ali lists down all the current debts he has.
- He arranges them by smallest to largest total amount, not by monthly repayment amount: Credit card (RM1,000), education loan (RM2,500), and car loan (RM18,000).
- Ali pays off the loan with the lowest amount (credit card debt) in two monthly payments of RM500, while still repaying the minimum on the other loans.
- After the credit card is paid off, Ali moves on to the education loan with a monthly repayment of RM605, a sum of both the previous repayment amount with the current one: RM500 + RM105, hence the “snowball” effect. With this amount, Ali will be able to pay off the education loan in only 4 months!
- Next, he will move on to clear off his car loan with a total monthly repayment of RM905 – snowballing the previous payment amount with the current car monthly repayment. With this amount, the car loan will be cleared in 20 months (instead of 60!).
- He’s debt-free!
As you can see, this strategy starts small and helps you gain momentum as you start clearing your debt one by one. Like with everything else, this requires a great deal of discipline and perseverance. Plus, you’ll also have to find that small snowball (Ali’s initial sum in #3) first, and over time you’ll feel like the repayment is extremely high.
However, this method is extremely encouraging because you get to see your debt disappearing fast, one after another.
4. Use your EPF savings
The great thing about our retirement savings a.k.a. Employee Provident Fund (EPF) is that we have Account 2 to help us with big-ticket purchases. (In case you didn’t know, there’s no way to withdraw from Account 1 until you reach your retirement age.)
While we’re unable to withdraw for debts from credit cards at this point in time, you can still use it to pay off some of your existing loans such as your mortgage and education (PTPTN). And from 1st April 2020, those aged 55 and below who are still contributing to EPF can withdraw RM500 every month, for the next 12 months. This is part of EPF’s i-Lestari initiative as a way to help Malaysians weather through a post-Covid-19 world.
There are more situations for when you can withdraw - you can explore them in our previous article here. All these also do come with some T&Cs which you can view on the EPF site itself.
If you’re able to use your account to clear off your mortgage (even partially), you’ll be able to free up more of your income to pay off the remaining debt you have. Granted this may leave a hole in your retirement savings, but it may be worth considering to keep you from defaulting on your loans. If you’re still working, you can slowly rebuild or add to your EPF once you’ve settled your pressing debts.
5. Use ‘found money’ to pay off balances
While getting bonuses may be a little tough nowadays thanks to the economy, ‘found money’ does come by once in a while. It could be extra money from your income tax refund, an annual raise, or even unclaimed monies you never knew you had.
(Yes, the last one is real. In October 2019, Malay Mail reported that the total unclaimed monies amounted to almost RM7 billion! You can check if you have unclaimed money here!)
You can also sift out some unnecessary items to sell, like branded shoes or bags. Consider doing an inventory on some of the things you have at home, and keep only what you can’t live without.
If you ever get that extra boost of cash, resist the urge to spend it as a “reward” for yourself. The biggest reward you can get is a debt-free future, so use it to clear off a chunk of your existing loans.
It would be a great idea to use it to kickstart the snowball method, and clear off your smallest debt first.
6. Consider using your emergency fund
Not the best thing to hear, we know.
Using emergency funds to pay off debt has been a popular argument, and for good reason too. One thing that this Covid-19 pandemic has taught us is that you can never tell what’s going to happen in the future. This is the very reason why emergency funds exist - to lend us a buffer in case something unpredictable happens.
But at the same time, not being able to pay off your balances will only amount to even more debt. In a blink of an eye, you may have grown your emergency fund… but you may also have doubled your debt amount, destroyed your credit score, and been at risk of defaulting on your loans. In some sense, this predicament could also be seen as an emergency.
Experts say that having an emergency fund with six months worth of expenses is healthy, but this may not necessarily be easy to obtain at this time. If you have looming debt, experts also suggest that it wouldn’t be a bad idea to cap your monthly savings at $500 (or RM500 for us), and put any excess money straight into clearing your debt.
It’s a tricky game of balancing which you’ll need to master, so strive for paying off more than the minimum, while saving a little for future rainy days.
7. Work part-time
They say that time is money, and it can’t be more true in this situation.
Hustle on the side to grow your income
It would be a great idea to pick up a side hustle to help supplement your income. Although the job market isn’t favourable at this point in time, there are still jobs to be done. If you’re already good at something, you may want to consider lending your skills to someone else for a fee. Who knows - apart from giving you extra cash, you could be building the foundation to your own future business.
We’ve also previously covered some of the jobs Malaysians can do during this time, which includes jobs that don’t require specific skill sets.
The More Disciplined You Are, The Faster It Is To Get Out Of Debt
If you find that you need more help, you can always consider signing up for credit counselling. For starters, Agensi Kaunselling dan Pengurusan Kredit (AKPK) provides financial counselling sessions and debt management programs to Malaysians, all for free. If you have extra cash, you can even speak to a hired financial counsellor for some hands-on help to manage your repayment.
At the beginning of our article, we mentioned that clearing debts is a long and arduous process. As discouraging as it may seem to calculate just how much you have to give back - and for however long - it’s not impossible if you have discipline, persistence, and the right methods.