Four ways to pull out of credit card debt trap
"Many opt for settling their dues once and for all through a debt-settlement option; what we fail to realize is that such settlement does more harm than good by bringing down our credit score and restricting our ability to take loans in the future"
- Dec 16, 2016,
- Updated Feb 17, 2017 6:54 PM IST
Most of us can relate to Vaibhav's situation. And often, just like Vaibhav, many opt for settling the matter once and for all through a debt-settlement option. What we fail to realize is that such settlement does more harm than good by bringing down our credit score and restricting our ability to take loans in the future.
Here are few better ways of pulling yourself out of credit card debt trap:
Credit card balance transfer: Transferring your outstanding balance to another credit card is the best option for clearing off your credit card debt. You can either opt to transfer your balance to your other existing card or avail a new credit card for that purpose. You will get a limited promotional interest rate period during which a lower or zero percent interest rate will be charged on the balance transferred. The entire objective of this facility is to allow you a certain limited period (usually in the range of 3 to 6 months) to work around your finances and pay off your entire debt. For example, SBI Credit Cards allow you to opt for either a 60-day tenure @ 0% interest rate or 6-months tenure @ 1.7% interest rate per month. However, remember that the transferred balance will attract the usual interest rate after the end of the promotional period. Many credit card issuers also allow the facility to convert your transferred balance into EMIs. Compare the processing charges, offers and benefits, interest rates, processing fee and duration of promotional period of various cards before settling on any card for balance transfer.
Fresh loans at lower interest rates: You can also consider raising loan for paying off the debt. The interest rates on personal loans, gold loans or loan against bank FDs and securities are much lower than the rates charged by credit cards. For example, while interest rate on credit cards can range anywhere between 25-30%, personal loans come at a much lower rate of 12-25%. Opt for gold loan or loan against securities if you fail to avail personal loan due to your poor credit score or insufficient income.
Conversion of outstanding dues into EMIs: Opt for this option if you fail to transfer your outstanding balance to another credit card or take a fresh loan for paying off your dues. This option allows you to convert your balance into EMIs of 3-12 months period, usually at an interest rate of around 18% p.a. Keep in mind the 1.5%-3% processing fee charged for converting your outstanding balance into EMIs. Also, remember that non-payment of EMIs by due dates may attract standard credit card interest rates on the balance amount.
Redemption of investments: Opt for this only if liquidation of your existing investments does not carry a high opportunity cost. For example, closing your FDs for repaying your credit card debt makes sense as they won't pay you more than 9%. This is much lower than the interest rate you will pay even on alternative loan options, such as personal loan, gold loan or EMI conversion. On the other hand, redeeming your equity mutual funds may involve high opportunity cost, especially during bull markets. During bull markets, your return on equity investment can easily cross 20% p.a. thereby making personal loans at 15-20% interest rate a much cheaper option. Instead of redeeming your mutual fund investments, opt for a loan against your mutual funds.
Credit card debt is possibly the fastest growing debt. Always be careful when you are using your credit card and keep a track of the bill being accumulated. Swipe your credit cards for only what you can comfortably repay at the end of your billing cycle. However, if things are already beyond control, opt for the above-mentioned options in the stated order and avoid the settlement option to extent possible. Also avoid fresh transactions through your credit card, until you pay off the last penny on your outstanding bill. Once things get back in shape, take out your credit report and make sure that your repayments have been updated in it.
by, Sahil Arora - VP and Business Head - Payment Products, Paisabazaar.com
Most of us can relate to Vaibhav's situation. And often, just like Vaibhav, many opt for settling the matter once and for all through a debt-settlement option. What we fail to realize is that such settlement does more harm than good by bringing down our credit score and restricting our ability to take loans in the future.
Here are few better ways of pulling yourself out of credit card debt trap:
Credit card balance transfer: Transferring your outstanding balance to another credit card is the best option for clearing off your credit card debt. You can either opt to transfer your balance to your other existing card or avail a new credit card for that purpose. You will get a limited promotional interest rate period during which a lower or zero percent interest rate will be charged on the balance transferred. The entire objective of this facility is to allow you a certain limited period (usually in the range of 3 to 6 months) to work around your finances and pay off your entire debt. For example, SBI Credit Cards allow you to opt for either a 60-day tenure @ 0% interest rate or 6-months tenure @ 1.7% interest rate per month. However, remember that the transferred balance will attract the usual interest rate after the end of the promotional period. Many credit card issuers also allow the facility to convert your transferred balance into EMIs. Compare the processing charges, offers and benefits, interest rates, processing fee and duration of promotional period of various cards before settling on any card for balance transfer.
Fresh loans at lower interest rates: You can also consider raising loan for paying off the debt. The interest rates on personal loans, gold loans or loan against bank FDs and securities are much lower than the rates charged by credit cards. For example, while interest rate on credit cards can range anywhere between 25-30%, personal loans come at a much lower rate of 12-25%. Opt for gold loan or loan against securities if you fail to avail personal loan due to your poor credit score or insufficient income.
Conversion of outstanding dues into EMIs: Opt for this option if you fail to transfer your outstanding balance to another credit card or take a fresh loan for paying off your dues. This option allows you to convert your balance into EMIs of 3-12 months period, usually at an interest rate of around 18% p.a. Keep in mind the 1.5%-3% processing fee charged for converting your outstanding balance into EMIs. Also, remember that non-payment of EMIs by due dates may attract standard credit card interest rates on the balance amount.
Redemption of investments: Opt for this only if liquidation of your existing investments does not carry a high opportunity cost. For example, closing your FDs for repaying your credit card debt makes sense as they won't pay you more than 9%. This is much lower than the interest rate you will pay even on alternative loan options, such as personal loan, gold loan or EMI conversion. On the other hand, redeeming your equity mutual funds may involve high opportunity cost, especially during bull markets. During bull markets, your return on equity investment can easily cross 20% p.a. thereby making personal loans at 15-20% interest rate a much cheaper option. Instead of redeeming your mutual fund investments, opt for a loan against your mutual funds.
Credit card debt is possibly the fastest growing debt. Always be careful when you are using your credit card and keep a track of the bill being accumulated. Swipe your credit cards for only what you can comfortably repay at the end of your billing cycle. However, if things are already beyond control, opt for the above-mentioned options in the stated order and avoid the settlement option to extent possible. Also avoid fresh transactions through your credit card, until you pay off the last penny on your outstanding bill. Once things get back in shape, take out your credit report and make sure that your repayments have been updated in it.
by, Sahil Arora - VP and Business Head - Payment Products, Paisabazaar.com