Question: Hi Sir Randell! I’m sorry to take up a few minutes of your time, but I’d like to ask you a question since based from research, you are one of the best personal finance experts in the country, and my concern is very much related to your expertise. My question is: Should I pay my debt first or should I invest, and then use the returns on the investments to pay the debt? I have friends who have been telling me to invest “today rather than tomorrow” but is that smart considering I have debts?—Lia via Facebook

Answer: Hi Lia! I’m always happy to help! My dream is for every Filipino to become financially free, and that starts with education—teaching the basics of personal finance.

However, education is only the first step. Execution is what is important.

The advice I give here will be useless if there’s no follow through, so I deeply suggest that after you read the column, you practice what you read.
Moving on to your question, so should you pay your debts first before you invest?There are numerous aspects to consider, but one of the more significant factors is the interest rate.

Interest rate and ROI

What is the interest rate offered by your credit card company? What is your possible return on investment (ROI)?

If the interest rate on your credit card debt is 3.5% monthly, or 42% annually, and your ROI by buying a “hot stock pick” is 100%, the answer seems like a no-brainer. Invest first and use the 100% ROI to pay the debt.

However, you have to remember the interest on credit cards is guaranteed, while returns on investments are not. You can gain 100%, but you can lose your money as well.

You’ll definitely be accruing interest payments by not paying your full credit card balance. In this case, it would be advisable to pay your debt first and invest later.

Can’t you do both? Invest and pay debt?

Yes, you can if:

You have a surplus of money coming in.

If your bonus or 13th month pay is only a few weeks away, you can use the money to pay both your credit card debt and open an investment account. If you have a credit card debt of P10,000 and are expected to receive your 13th month pay of P20,000, you can use 50% to fully pay your debt and the other 50% to open an investment account.

Your debt amount is small.

If your debt is P10,000 and you are earning much more than that, you have the room to pay your debt and invest at the same time (provided you already have an emergency fund).

Lia, I hope the guidelines here have given you more clarity when it comes to making a decision.

So should a person pay his or her debts first and then invest later? Or he or she can do both?

As you can see from the points above, it really varies and depends on a person’s situation and circumstance. Just remember that if you decide to pay your debts, invest, or balance doing both, you’re taking yourself one step closer to financial freedom.

As always wisdom is needed.

There’s a big debate with credit cards. Is it good or is it bad? Others prefer credit over cash. It’s safer to carry, and credit cards offer perks and discounts in which you can actually save rather than spend more. The other half think credit cards are evil. Your money is eaten up by interest rates, and before you know it, you’re buried in credit card debt. So which is it, really? Are credit cards good or bad? It depends really. It depends on how you view credit cards and how you handle money.

So are you ready for are credit card? If you are, you can use credit cards to your advantage; however, if you’re not ready for one yet, then you might really think plastic is evil. Below, I prepared a guideline you can follow to determine whether or not you’re ready to have a credit card.

You’re ready for a credit card if:

You spend less than you earn

If you always have savings by the end of every month, then that is proof that you know how to handle money. You’re not finishing your salary up to the very last centavo or racking up debt or ‘utang’. You already have the mindset that saving is a necessity, and there’s no need to finish your entire salary. Even better is if you save first before you spend, wherein you automatically transfer a percentage of your income from your payroll account to your savings, and you use the remainder for expenses. Take note though that if you get a credit card, you have to stick within your limit. This means you shouldn’t take away money from your savings to pay your credit card balance.

You can say ‘no’ to impulse shopping

The beauty about credit cards is it makes the shopping experience even better than it already is. Shopping becomes a breeze when you just hand the cashier your credit card, he or she swipes it, you sign, and voila, you can leave the shop with a new item (or more) in hand. This is bad, bad, bad for those who cannot control their spending. You’re not ready for a credit card if you’re susceptible to ‘shop til you drop’ or you can’t say ‘no’ when you see a big red ‘sale’ sign. On the other hand, if you can control your expenses and can walk past a ‘sale’, this is a sign that you have your spending in order and are ready for a credit card.

You’re NOT ready for a credit card if:

You view credit cards as free money

As mentioned above, the use of credit cards improves the shopping experience. It makes it easier, faster, and more convenient to shop. Because of this experience, others may view credit cards as free money. It’s not like debit cards in which the amount you spend is automatically deducted from your account. With a credit card, you don’t have to pay the balance right away, so technically, the Php 1,500 is still there in your account even if you already bought an item worth that much. If you think you’re going to have this mindset, wherein you see yourself paying the minimum required amount instead of the full balance, then you’re not ready for a credit card. You will just rack up interest charges by doing so and treating credit cards as free money or balances that do not need to be paid in full.

You need a card to pay back a debt or buy a ‘necessity’

Another sign which shows that you may not be ready for a credit card is when you plan to use it to pay back a debt or buy a ‘necessity’. Your sneakers broke and you’re thinking you can apply for a credit card to buy a new pair. Where’s the harm in that? You can always pay your credit card balance once you get your salary. If you do this, you’re already taking on debt by borrowing from your future salary. Even if you expect to receive your income by the end of the month, don’t treat money that is still coming as money you already have. Your credit card balance must be paid in full every month to avoid incurring interest fees. You’re not ready for a credit card if you don’t have the money to pay back the balance you will incur when you use it.

Looking for the right one

Owning a credit card is a big responsibility. If you lose sight of your spending patterns and money management habits, your credit card may own you instead of you owning a credit card. This means that you may incur credit card debt, go over your limit, or worse, keep on applying for more credit cards just to keep afloat. The guideline above is a good starting point to determine whether or not you’re ready for a credit card.

In the event that you decide you’re ready for one, keep being responsible and this means to do your research first. Don’t apply for the first credit card you see or the first agent who approaches you. Use the internet first to research which credit card has the lowest interest rate or which offers the features most suitable for you (e.g. miles, cashbacks, dining promos, etc.). To help you with your research, you can use comparison websites, such as MoneyMax.ph, wherein credit cards from different institutions can be filtered and sorted according to your preferences.

Debt is a a big concern for many of us. I have never met anyone who feels happy that he or she carries a lot of debt. If debt can be stressful, imagine the agony of having bad debts? People say that debt can make or break a person. So what if you have bad debts that ruined your credit history? What can you do?

The best solution to a debt problem is to pay those debts and never borrow again — but life is never that easy… I know, right?

Learn from past experiences – if only it were that easy in all situations. Remembering to walk your dog every day, so you can keep your home tidy is one thing; ruining your credit and having difficult applying for a new one is another level. When it comes to finances, be it your monthly income or your loan balance, all these instruments are related and affect one another. You have a high monthly income? Then you can loan a larger amount. You don’t have a credit history? Then you may be given a higher interest rate on a loan?

What about if your ruin your credit? What are the repercussions?

The following are the effects of having bad or ruined credit:

• You can have difficulty applying for multiple lines of credit, be it credit cards, loans, etc. (but it’s not impossible)
• You may have a hard time starting your own business (because banks check your credit history when you apply for a loan).
• You can be charged higher interest rates on these loans.
• You will spend more money through the years because of interest payments.

As mentioned above, the takeaway is to learn from past experiences. Now, that you know the disadvantages of having ruined credit, what can you do to fix that?

Here are 5 ways to repair your ruined credit history:

Build positive credit

You’re balancing credit card debt, a car loan, and a home loan. You may think your situation is hopeless, but think again. There are many others in your situation, but more than that, you can turn your situation around. If you want to improve your ruined credit, then don’t make the same mistake on other forms of credit. Your credit card history tanked because you forgot to make payments the past few months? Then, don’t let the same thing happen to your car and home loans. If you can pay more than the minimum amount on your loans, then do so. As mentioned above, your financial instruments are inter-related. Fix one, and it affects all others. Here are 5 ways to build positive credit:

• Apply for a variety of credit types, be it a home or car loan (provided that you make the regular payments)
• Be a supplementary credit card holder of your parent (but don’t take advantage of them)
• Don’t apply for multiple credits at once (it may show your dependence on credit)
• Pay your bills on time
• Start with a low amount (be it your credit limit or your loan value)

Go secured

Using secured credit cards is the best first step when it comes to credit management. This is because having a secured card requires you to make a deposit which will determine your credit limit. If you deposit Php 15,000, 80% of that, or Php 12,000, will be your credit limit. This gives the bank assurance that if you max out your credit card, you have the money to pay your balance because you made a deposit. The more you utilize your secured credit card, the more you are building your credit history, which helps in repairing your ruined credit.

Negotiate

Paying your credit card balance – it’s easier said than done. This is where the power of negotiation comes in. If you’ve wracked up debt, try to negotiate with your issuer a settlement of the amount you owe. When someone owes you money, you prefer that they pay you back regularly (and sooner than later) instead of waiting while they keep giving empty promises. The same works for financial institutions. If you have a large amount due, try to negotiate the following steps:

• Moving your due date near or on the same day as pay day
• Coming up with a long-term repayment plan both you and the borrower agree on
• Reducing your interest rates if you make a lump sum settlement payment
• Reducing the amount you owe with a lump sum settlement payment

Read and research

It always pays to do your research. Whether it’s choosing which bank to open a savings account or a credit card with. The same works for handling and managing your money, debts included. The internet is flooded with various resources you can use to help you figure out what you can do to repair your ruined credit. Read blogs tackling credit card. I’ve written about how to get out of credit card debt among many other.

Even further, it’s best to do your research even before you apply for any sort of financial instrument. Applying for a credit card? Search for institutions that offer the lowest interest rate, flexible payment plans, and the highest cashbacks among other features. Comparison portals, such as MoneyMax.ph, compile all this information into one platform which you can personalize and filter according to what you’re looking for.

Turn the above into habits

When it comes to your financial well-being, longevity counts. When applying for a credit card or a loan, institutions look at your credit history. The number of years you’ve owned a credit card is a plus point in your application. In the same way, practicing proper credit management will improve your ruined credit. Regularly paying down your loans and utilizing your credit card without going above your limit over a set period of time will improve your credit.

So how do you make sure that you won’t go back to your old ways? Turn your actions into habits. Whether it’s regularly negotiating the best deal or discount or reading finance-related articles every night before you go to sleep, if you make a habit out of the tips above, you’ll see your credit history improving over the long-term.

More than improving your credit history, practicing the tips above will trickle down to the other aspects of your financial life. You’ll learn how to manage your finances, value money, and be independent of debt among many others. As mentioned above – learn from past experiences – so once you improve your credit, keep it that way.

Remember,  credit is a privilege and not a right — be careful how to use or it will be big burden for you to carry for a long, long time.

The rich rules over the poor, and the borrower is the slave of the lender. – Proverbs 22:7, ESV