I was recently introduced to the world of Frequent Flyer points. While not an avid fan in the past, I was explained by a close friend how I could earn frequent flyer points on things I was already doing – like shopping, petrol and a few other things.
This lead me to apply for a frequent flyer credit card (with no annual fee) to attempt to collect even more frequent flyer points on my everyday purchases. I figured I could put the groceries, petrol and collective little purchases on the card that I would normally make in any week, earn the points and then repay in full on last day of month.
A strategy that many people have tried only to fail in the latter part of making full repayments at the end of each month.
As someone who has struggled with credit card debt in the past (both me and my wife) I decided to make the card limit very small when applying, basically as a way to limit my downside of falling back into debt should the worst occur.
I filled out the application, hit submit, put my hands behind my head and leaned back only to be told – your application is pending. Ok, ‘no big deal’ I said to myself. They probably need to check my pay slips as per any responsible lending criteria.
1 week passes and I get an envelope in the mail
The credit card company has rejected my application.
While I might have expected a rejection for a big sum of money, I was rather shocked to be honest as the sum wasn’t all that high and up until now, had never been rejected – it was the other way round, my rejecting them!
Is my credit rating in a bad state? I don’t think so (I recently did a credit check and came out fine). Am I flight risk of never repaying a debt? Nope. Then what is it that is causing me to be rejected for such a novel sum of money?
The reality of my personal finances suddenly set in
This is when the reality set in. Up until this point, I never had a mortgage or a personal loan or a secondary mortgage (that I used to repay some other debts).
I wasn’t rejected because of some unfair reason; I was rejected because I am carrying far too much debt.
It was like getting slapped in the face with an icy cold hand. I have too much debt and lending companies are scared to give me money.
I did my usual sequence of dealing with things. First I feel sorry for myself, then I questioned all of the reasons this happened and eventually end up in a single state that proves to be rather useful for me; anger.
I was angry that I let myself get to this point. While a mortgage is fine, the personal loans were not. I really should be doing more to repay these and get rid of them once and for all.
Anger is a great tool for me as it makes me get up and do something. I immediately sat down and wrote out all of debts.
While I consider this highly personal, I am going to share them with you so you know exactly what I am dealing with (and hopefully you get the same motivation I now have).
- $20,000 in personal loan debt from renovating my house.
- $30,000 in consolidated debts from wedding, buying a house, some unexpected emergencies and more.
- $2,500 in a Go MasterCard from Domayne (couch purchase interest free)
I then set myself a very clear goal. Not to repay the debts instantly (as this isn’t likely) – but instead I set a goal to reduce the debt and then permanently lower the credit limit to avoid redrawing it.
This means making a payment to the personal loan and then calling the bank and asking them to permanently lower the credit limit for good.
Don’t laugh, but this was a new way of looking at debt repayment
As a strategy, this was kind of new to me. In the past I would simply chip away at the debts and once they were paid off, call the bank and ask them to close the account. This time however, I am opting for progressive credit limit reductions – which means I will never be able to go backwards again.
So with my new found goal in place, I then sought new ways to pay extra towards these debts. Forget the typical ‘reducing spending’ tactics, I wanted to get rid of these debts and get myself some breathing space as fast as possible.
The great share sell off
I had around $11,000 in shares from many years of adding a little ‘here and there’ to my portfolio. As much as I loved these shares and wanted to keep them for the longer term; they had to go. $11,000 sitting in shares while I suffer debilitating interest on personal debts is not very smart.
I sold the shares and grabbed a piece of paper. On the paper I drew a diagram of my debts and above all of the debts I put the $11,000 figure.
I drew an ugly little diagram to act as my ‘attack plan’ to repay debt
How should I divide the money between my debts? Normally I would put the money on the highest interest rate first, however in this instance I was willing to avoid the ‘right thing to do’ to stay motivated and improve my ‘overall’ financial picture.
Here is what I drew on the debt diagram:
- Pay $2,500 to store credit card – ring up and cancel.
- Pay $6,000 to personal loan – ring bank and lower limit to $15,000 and leave $1K buffer for emergencies (bub on the way, just in case I need the money).
- Pay $2,500 to home loan #2 – ring up, permanently lower the limit and request for a new fortnightly debit amount (which is now reduced).
As you can see, I made some good progress (as I was lucky enough to have shares to sell) on all aspects of the debt.
I have also implemented a strategy or two while I continue searching for other ways to pay lump sum repayments (like paying more than the minimum). For now however, I am on an angry mission to repay my debts.
My tax return should allow me to do another big swipe on the debts and in doing so once again reduce my exposure to an open line of credit.
Is this news to you?
Have you ever implemented a strategy such as this to repay a debt and then permanently reduce it to remove the temptation? While quite straight forward, I never really bothered to ring the bank and lower my limit (no matter how small the amount).
From now on, anything over $200 I put on a debt will be followed by a call to permanently reduce and close that portion of the credit limit.
Sorry banking call centres, you are going to hate me.
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