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Cut the card debt

Cut the card debt

Interest costs on credit cards cost a fortune. Here's how to pay it back.

When you are buried deep in credit card debt, making card repayments can be a dauntingly expensive affair. After all, this debt is charged at 2.95 per cent per month, which is a whopping 41.75 per cent per annum. Add to that service tax that is charged on interest and the cost goes up to a nightmarish 48 per cent per annum.

For all its advantages (convenience and a standby during emergency), the disadvantages are far greater, that is if you choose to roll over your credit and pay only the outstanding minimum balance.

A simplistic comparison against other forms of debt shows how big the gap is between credit card and other loans. The cheapest loan, a home mortgage, costs around 11 per cent, while a car loan costs around 14-15 per cent. In fact, banks are more than willing to lend without any collateral in the form of a personal loan at 18-20 per cent, provided there's a regular income and the paperwork is clear.

Rates on consumer durable loans range around 16-18 per cent. Yet, when it comes to buying, say, a laptop, most people are prone to quickly flashing that credit card.

But using that card too often is terribly expensive. Assume you have run up a bill of Rs 1 lakh on your card, purchasing laptops and computer equipment, and are rolling over the balance outstanding, paying only 5 per cent per month. The total interest and service tax cost in the first year is a staggering Rs 35,920. But worse is when you choose to continue to pay the minimum balance payment, it could take 30 years for you to repay the balance. Continue paying the minimum balance for three years and eight months, you are weighed down by interest cost of an overwhelming Rs 1,00,193-the cost of your original laptop.

Needless to say, the best thing to do is to pay off credit card debt at the earliest. Here are some ways to pay it off.

How to Save a Bundle

  • Cards cost a staggering rate of 2.95 per cent per month or 41.75 per cent per annum

  • Service tax on interest rates adds to the monthly outflows

  • A personal loan costs far lower at around 18-20 per cent per annum

  • If you have a huge outstanding, switch to a personal loan

  • It's possible to save more than 60 per cent on interest costs 

Tap Savings

Money parked in a savings account earns just 5 per cent per annum or if it's a fixed deposit, about 10-11 per cent per annum. That means you get only Rs 5,000 per annum on a Rs 1 lakh deposit as against paying Rs 35,920 in interest cost in the first year.

Draw on relatives

Friends and relatives are likely to finance you at no interest cost. If you can obtain such a credit line, take it and pay off the card debt.

Switch to cheaper loans

Loans that are cheaper than your credit cards are a better option for those who don't have access to other financing alternatives. On a three-year personal loan of Rs 1 lakh, you only pay Rs 30,148 as interest cost for three years as against Rs 35,920 of credit card interest in the first year. In fact, paying the first month's minimum payment of Rs 5,165 (see How Much a Card Costs) due towards your personal loan EMI (equated monthly installments) can wind up your card loan in a quick 23-24 months.

Published on: Aug 31, 2007, 5:18 AM IST
Posted by: AtMigration, Aug 31, 2007, 5:18 AM IST