Stuck in a debt of 3 credit cards

Question

I have 3 credit card and I have utilized the funds of these cards 100%. Now I need to pay back the amount to bank. I am from Pakistan and the currency is PKR. Here is the stats:

1. Card 1 - 4.5K (cash credit card- Daily markup)
2. Card 2 - 3K (cash credit card - Daily Markup )
3. Card 3 - 1.5K (Master credit card)

Banks of Card 2 and Card 3 allows me to do equal monthly installments but not bank1.

My salary is about 120K. And to pay loans per month I can only pay 0.5K from my salary for all these cards. Sometimes I got additional payments from my freelance work.

Now main issue is that bank is charging me high markup on these 3 cards approximate 30% per month. So from various months I am only paying interest to the bank instead of actual amount.

What is the best action plan to pay to bank. Can i make loan from Bank 1 only to pay the debt of Card 1. Minimum period of loan is 1 year and I don't want to extend these payments for more than a year. But if I apply a loan for this card then I am unable to pay installment for card 2 and card 3 in full.

Kindly share your experience that what is the good approach.

Thanks

Answer 1

Do not make any additional debt. You have a serious financial problem now that is you cannot manage your money. With income of 120k you should be able to pay 15k debt each month. You have to list down your expense and cut unnecessary expense. Use that money to pay credit card.

Wait. Is that 120k a yearly income or a monthly income?

Answer 2

Based on your statements, you have a combined credit card debt of 9K. You indicate you can afford to pay 0.5K/month. You indicate the "markup" (presumably, the interest) is 30% per month, meaning you have to pay 2.7K/month in interest alone.

If so, you are bankrupt. You should try to earn more money, cut your other expenses, or negotiate a payment plan. If you can do none of those things, you need to declare bankruptcy because you are nowhere near able to pay even a small fraction of the interest charges each month.

I may have misunderstood these statements. For example, maybe the interest is 30% per year, meaning you have to pay 0.225K/month in interest. If so, you can get ahead of your debt. Cut up your credit cards and start paying them down. You'll pay them off completely in much less than three years. You'll still do better if you can cut your other expenses or increase your income, but you can get there.

Alternatively, maybe you pay an unspecified interest on your credit card debt but they expect you to repay 30% per month. Again, you can't afford that, not anywhere close. But you can afford to repay them over time and in general, companies that hold debt are happy to negotiate a payment plan over several years whereby you pay off the full amount of the debt. Again, cut up your credit cards to prevent yourself getting any further in debt, but don't stress too much because you can clear everythin gup.

Answer 3

I do not know how much 120K PKR means and how does this translates into the cost of living, so bear with me if some of my points seem to be too harsh.

The standard answer is that you pay first the debt with the highest interest rate. This means that as you pay more and more the cost of your interests goes down as much as possible for the buck. To this rule of thumb you should add considerations about which debts penalize you for early payments and the like.

But the fact is that your problem is deeper than. You claim that you may direct 500 PKR/month -> 6000 PKR/year to debt.

But that is just a very small 0,4% of your income. If that is all that is available to you after paying your living costs, any unexpected expense will eat that meagre excedent and will stop you from paying the debt, getting you to pay more interests and probably getting even more into debt.

That is the basic problem. You should focus on increasing your "uncompromised" income (either by earning more, doing economies or both), as any unexpected problem will derail any payment schedule that you make. In fact, I guess it is probably the reason why you have got those debts in the first place.

And yes, I know that "earn more and spend less" is easier said than done and that this is not a particularly insightful answer, but it is an issue that you should consider while evaluating how to recover from this situation.

Answer 4

Go to each bank and explain your situation. Ask them to help you. You're no good to them if you go into defaults and are unable to pay. It's in their best interests to help you.

It's possible in many banks to get a bond with lower interest rates which is used to pay down the credit cards. I wouldn't expect to get this, but ask. It's quite common where I'm from. The principle will effectively be the same in the eyes of the bank. I'd expect the credit limits of the cards to be cut down instead for some time, which is probably not such a bad thing.

If they say no, well sorry. Pay down the highest interests first and with these extreme penalty interests I'd consider going above and beyond for a short period of time to get some extra income or borrow from friends and family (please don't do the latter if you plan on taking out more consumer debt).

I don't know why you're in the situation you're in, I don't know if it's because of health reasons or poor money management. Either way, you need to start educating yourself on how you can put yourself in a position where you don't need consumer loans, where you're living below your means meanwhile increasing your income.

Countless great books and podcasts on personal finance have been released so I don't think anyone here needs to tell you what to do, just to get started looking.