How to best manage your personal financing payment strategy
You'll probably take up at least some financing in your lifetime, based on your needs and goals at any point in time. As there's a wide range of financing facilities available out there in the market, such as personal financing, mortgage financing, renovation financing, education financing, vehicle financing, credit card balances and personal lines of credit, it's a good idea to think about which financing you should fully pay back first, and which can be paid off more gradually.
A good start in prioritising which financing to fully pay off is making sure you do your homework in comparing profit rates and outstanding tenors.
Essentially, there are 2 ways to manage your outstanding balances - you can either choose to pay down the facility with the highest profit rate first, or pay off the facility with the least outstanding balance first. It's important to remember, however, that these 2 methods are not applicable to structured financing, such as mortgage, vehicle and renovation financing.
The debt avalanche method
Focusing your resources on paying off debt with the highest profit rate is a debt avalanche strategy. Using this method to shave off your debt will most likely see you paying off debt in a shorter time period.
The debt snowball method
The other payment option you could choose is the debt snowball method, where you pay off your debt starting with the lowest financing facility. This could help reduce the total number of outstanding financing facilities you have, and the upfront, small wins at completely clearing a facility may help you feel less overwhelmed.
Which method makes more financial sense?
Let's say you have 4 financing facilities to pay off, each with a different profit rate and outstanding balance.
| Type of financing |
Profit rate |
Total outstanding financing balance |
|---|---|---|
| Credit card A |
18% p.a. |
RM2,000 |
| Credit card B |
15% p.a. |
RM12,500 |
| Line of credit |
18% p.a. |
RM1,000 |
| Balance transfer |
10% p.a. |
RM8,000 |
| Type of financing |
Credit card A |
|---|---|
| Profit rate |
18% p.a. |
| Total outstanding financing balance |
RM2,000 |
| Type of financing |
Credit card B |
| Profit rate |
15% p.a. |
| Total outstanding financing balance |
RM12,500 |
| Type of financing |
Line of credit |
| Profit rate |
18% p.a. |
| Total outstanding financing balance |
RM1,000 |
| Type of financing |
Balance transfer |
| Profit rate |
10% p.a. |
| Total outstanding financing balance |
RM8,000 |
If you use the debt avalanche method, that means you'd choose to pay off credit card A first, because it carries the highest profit rate of 18% p.a. Even though credit card B has a higher outstanding balance of RM12,500, it's got a lower profit rate of 15% p.a., so you'd turn your attention towards paying it back fully after you've paid the outstanding balance of credit card A.
If the debt snowball method's what you choose, you'd opt to pay off your line of credit first as it carries the lowest outstanding balance of RM1,000. After you've cleared that completely, you'd then shift your priority toward fully paying off credit card A, followed by the balance transfer and finally credit card B.
Whichever method you choose, be sure you at least make the minimum required payments on your debt balance. If you're able to, try to clear more than the minimum required payment in order to shorten your payment period and lower the management fees. For example, if your credit card only requires you to pay off 2% of your balance every month, simply paying that amount would prevent you from being charged late payment fees, but it's not really going to go toward paring down your outstanding bill if the profit rate levied on the card is 18% p.a.
Ultimately, if you don't want to be saddled with mounting profit payments that can really add up substantially over time, it makes more financial sense to rely more on the debt avalanche method to pay off your debts.
Debt payment tools
We've got some great debt payment tools for you to manage your debt portfolio. You could actually take on a personal financing facility to clear your outstanding credit card balances. HSBC Amanah Personal Financing-i offers financing of up to RM250,000, spread over a tenor of up to 7 years2. Since personal financing profit rates range from 7.5% p.a. to 12.5% p.a., with Premier customers getting a 4.88% p.a. profit rate, this is a great option if you've got credit card debt carrying a significantly higher profit rate ranging from 15% p.a. to 18% p.a., or even more. Plus, you get the perks of a longer payment period3 to help reduce the stress of clearing your debt.
Another tool you can pick if your total unsecured financing is debt consolidation, which combines all your debt into just 1 personal financing facility3. The HSBC Amanah Personal Financing-i Debt Consolidation feature offers you the chance to refinance your outstanding debts into 1 term financing, for which you can make fixed monthly payments over a period of 2-7 years.
All in all, financing offer you a ticket to chase your dreams, whether it's buying a new home, furthering your studies, or opening your own cafe in Bangsar. If you manage your debt payment plans optimally, you'll not only be able to reap benefits like profit savings; you'll also be able to pursue those dreams with much-needed peace of mind.
Disclaimer
This document is issued by HSBC Amanah Malaysia Berhad (Company No. 807705-X) ("we", "us" or "our"). The contents of this document are confidential and are intended for use by the customer whom this document is prepared for and addressed to the customer ("you" or "your") exclusively and may not be divulged without our prior and express consent. This document is provided to you solely for the purposes of enabling you and us to review how we and other members of the HSBC Group (collectively "HSBC") currently provide products and services to you and to discuss how HSBC can enhance and improve on the same. Any other use is prohibited unless you first request and obtain our written permission.
While reasonable care has been taken to ensure the accuracy of this document, HSBC does not make any representation or warranty (expressed or implied) of any nature including, without limitation, the adequacy, accuracy, currency, correctness or completeness of the information contained herein (whether the information is generated from or held within the HSBC system or is provided by third parties) and HSBC does not accept responsibility or liability for any errors or omissions. Any opinions in this document constitute the present view or judgment of HSBC and is subject to change without notice. This document is intended for reference and to facilitate discussion only and should not be relied upon by you for any purposes and shall not be capable of creating any contractual commitment on the part of HSBC. Any examples given are for purposes of illustration only.
To the extent permitted by law, HSBC shall not be liable for any damage, loss or liability (whether arising in contract, tort, including negligence, or otherwise) arising out of or in connection with your use of or reliance upon this document.
The aforesaid exclusions apply to any damage which is direct, indirect, special, incidental or consequential or consists of loss of profits, business, goodwill, opportunity or data. All of the above exclusions apply even if you have advised HSBC of the possibility of the above types of damage, loss or liability.
All intellectual property rights (including, without limitation, copyright, database rights, design rights, patents and trademarks) in this document are owned by or licensed to HSBC unless otherwise stated. Without limiting the above, unless you first obtain written consent from HSBC, you may not copy, reproduce, duplicate, publish, modify, adapt, publish, broadcast, create derivative works of or in any way exploit all or any part of this document.