Purchasing by way of credit cards can be effective if you can commit to spending inside your capacity and spend off the dues on time. On the other hand, spending beyond what you can repay and inability to repay the bills by their due dates can land you in a debt trap.
Here some of the prevalent blunders you may be producing that can land you in a debt trap:
Not paying the complete credit card bill
Credit card issuers levy steep finance charges of 24-49% p.a. on the unpaid proportion of credit card bills. They also revoke the interest-no cost period on fresh credit card transactions till the repayment of the unpaid credit card bill. Thus, non-payment of complete credit card bills for quite a few consecutive months along with continued credit card spending throughout that period can lead you to a credit card debt.
The greatest way to deal with such scenarios is to convert the unserviceable element of the credit card bill. Opt for the EMI solution if you are unable to service your credit card bill. The interest price charged on such EMI conversion is a great deal reduced than the finance charges levied on unpaid credit card bills. The tenure of such EMI conversions can variety anyplace involving 3 and 60 months basis the card issuer. This permits you to pick out EMI tenures based on the EMI repayment capacity.
Credit card issuers also enable card customers to convert choose transactions beyond a predetermined threshold quantity into EMIs. Once the card holders convert their complete unpayable dues to EMIs, they can avail interest no cost period on fresh credit card transactions.
Just paying minimum quantity due by the due date
Many credit card customers wrongly think that repaying the minimum quantity due (MAD) pointed out in their credit card statement can save them from steep finance charges. While paying MAD would save you from incurring late payment charges of up to Rs 1,300 p.m. and stay away from reduction in credit score, you would continue to incur finance charges on the unpaid credit card bill quantity.
Using credit card to make ATM money withdrawals
Credit card issuers charge finance charges on all the ATM money withdrawals made by way of credit cards. They also levy a money advance charge of up to 3.5% of the quantity withdrawn. Card holders will continue to incur finance charges till they repay the complete quantity withdrawn from ATMs.
Avoid ATM money withdrawals by way of credit cards to the extent probable. If producing ATM withdrawals turn out to be totally unavoidable, then make sure to repay the complete money withdrawal as quickly as probable.
Tips for obtaining out of credit debt trap
EMI conversion need to normally be the very first response to save oneself from stepping into credit card debt trap. Having stated that, you need to also discover other solutions if the interest prices charged on EMI conversion and/or the quantum of the unpaid credit card dues are on the larger side. Here are some of the option solutions –
# Credit card balance transfer:
Many credit card issuers offer you balance transfer solutions to the current credit card customers of other card issuers. This solution permits card customers to transfer their unpaid balance to one more card issuer at reduced or nil interest for a pre-specified period, typically up to 3 months. This period is also recognized as the promotional interest period. This solution can be particularly effective for these possessing the capacity to repay their complete unpaid dues inside the specified promotional interest period. However, card issuers commence levying usual finance charges on the unpaid proportion of the transferred balance soon after the expiry of the promotional interest period.
Some credit card issuers also enable the transferred balance to be converted to EMIs. This solution would be beneficial for these lacking the capacity to repay the complete transferred balance inside the promotional interest period.
# Explore option loan solutions:
Personal loans, gold loans and major-up home loans (in case of current home loan borrowers) can be availed for obtaining out of credit card debt traps. The interest prices charged by the lenders for individual loans, gold loans and major-up home loans are typically reduced than the interest prices charged on EMI conversions. Hence, these becoming charged higher interest prices for EMI conversions can think about these option loan solutions to lower their general interest price. A lowered interest price will improve their possibilities of obtaining out of their debt traps sooner.
(The author is Director, Paisabazaar.com)