Do's and don'ts for debtors

Debt is a four-letter word, and many people are aware of it and try to avoid falling into its clutches.

However, people are having to pay more due to the increase of oil and food prices and the surging cost of essential goods while their incomes remain fixed, forcing them to dip into their savings to make ends meet.

When you are short of money and you need some immediately, borrowing from your parents or friends is normally the first choice. If they are unable to help, the next option is a cash advance from either a credit card or a revolving cash card.

Given that these charge different fees and interest rates, planning a suitable repayment period and amount can save you a lot.

Should you plan to pay off the debt in instalments, it is better to use a revolving cash card, as you will pay less interest. A cash advance from a credit-card account is a better choice if you want a longer repayment period. This is because revolving cash cards charge interest plus a use fee of 28 per cent per annum.

In Thailand, a cash advance from any credit card is subject to a 3-per-cent fee on the amount withdrawn plus 20 per cent interest per annum. With revolving cash cards, interest rates and use fees vary from 16-28 per cent depending on the lender and the borrower's creditworthiness.

For example, if you withdraw Bt10,000 using a credit card on March 2 and your credit-card statement is sent out on March 13 and the payment-due date is March 28, you will be charged Bt442.46 interest plus a cash-advance fee if you borrow over only one instalment period.

However, you will be charged only Bt199.45 (calculated at 28 per cent per annum) if you withdraw the same amount on a revolving cash card over the same repayment period. For a cash advance of the same amount with the same withdrawal date and payment-due date and repaid in two instalments on a credit card, you will be subject to a Bt534.57 advance fee and interest. If you only repay Bt5,000 in the first instalment and the balance in a second instalment, you will be charged Bt322.41 interest and the advance fee.

If you withdraw the same amount from a revolving cash-card account under the same conditions and you opt to repay Bt3,000 in the first and second instalments and the balance in a third instalment, you will pay less interest than on a credit card. In this case, you will pay a total of Bt791.31 for the cash advance fee and interest charge.

However, over a longer repayment period on Bt10,000, interest rates and cash-advance fees on credit cards are lower than on revolving cash cards.

If you plan to repay Bt2,000 in four instalments and the balance in a fifth, you will pay a total of Bt1,209.12 in interest and the cash advance fee, compared to Bt1,253.15 for a cash advance on a revolving cash card.

Regardless which cards you use to withdraw cash, here are some basic do's and don'ts that will help you avoid falling into the debt trap.

l Do shop around for revolving cash-card offers and the lowest interest rates. Some lenders have lower interest charges and cash-withdrawal fees than others, though interest rates are capped at 28 per cent per annum by the Bank of Thailand.

l Do pay by credit card when buying goods and services rather than taking out cash advances as the balance is subject to the same interest charge as a cash advance but there are no other costs.

l Don't just pay the minimum amount for each instalment. Pay as much as you can afford every month so that you reduce the debt as quickly as possible.

l Don't take out more cash than you need. The more cash you withdraw on a credit card or revolving cash card the more interest you will have to pay.

l Don't miss payments or pay later than the due date or you will be subject to penalty charges.