Rajiv Raj- Founder & Director -Creditvidya.com | MoneyControl.com
If you have reveled and gone overboard with your expenses on your credit card in the holiday season just gone by, it is likely that you find yourself straddled with a hefty outstanding balance. It is akin to a bad hangover you would probably suffer from on New Year’s Day after a great party on the 31st night! But unlike a hangover that can be gotten rid of in a few hours, credit card debt could be far more pressing! Here are some tips for you to consider if you are grappling with a debt pile that looks impossible to handle at the moment.
The happiness of buying goodies and spending on parties you may have attended during Christmas and New Year may have come to naught for you, if you are staring a hefty credit card bill right now. While that is definitely not the best way to begin a new calendar year, the damage is already done. If you are in a state of shock, for you certainly don’t have the money to repay your dues right away, here’s what you could do.
Take stock of the situation:
The first and most important step to take is to acknowledge the problem in hand. If you become a defaulter on your repayment on your credit card, it will impact your Cibil score negatively. While making one late payment may not hit you immediately, but if you get into the cycle of late payments it may be difficult for you to get out of it over a longer period of time (ranging over 60-90 days), which will then shave the points off your Cibil score eventually. To ensure that your Cibil score remains intact, you need to handle your credit card debt pronto. There are several ways to do it such as a balance transfer, converting your debt into an EMI or opting for a cheaper loan to repay your debt. Let’s look into these options in greater detail.
This is a facility that banks offer to people who have a large outstanding balance. In this facility you can transfer the outstanding balance from one credit card to another. You could opt for a fixed duration balance transfer (usually a 3-12 month window) within which you can make the repayment at an interest rate that is lower than what you would have paid on your regular credit card. The rate of interest is usually 9-10% (differs from bank to bank). Some banks also offer a “lifetime duration” option to make the repayment, though the interest rate in this case is much higher (in the range of 12-24%, depending upon the bank). In order to get this facility, you will have to pay a processing fee, which will be around 2% of the outstanding amount you wish to transfer. After the bank verifies your details, they will send you the cheque or the demand draft in favour of your existing credit card that you can use to repay the first card.
Although a balance transfer sounds like a great way to handle credit card debt, and other banks will be more than glad to issue yet another credit card to you, you must take cognizance of the fact that it is only postponing your problem instead of solving it. Your attempt should therefore be to use this facility sparingly. Besides, if you get into the habit of frequent balance transfers, you will end up opening a large number of credit lines. A large number of open credit lines may also impact your Cibil score, albeit marginally, in a negative way.
Converting outstanding balance to EMI:
If you do not want to go through the hassles of balance transfer from one credit card issuer to another you could consider converting your outstanding balance into monthly instalments. Banks may offer a rate of 1.49% to 1.99% per month to their existing customers, but this too may vary from bank to bank. However, the point to be noted here is that if you miss a payment cycle during the EMI repayment, the bank will revert to the regular interest charges and you will find yourself stuck back in the same situation.
Opt for cheaper loans:
Of all the debts you service, the rate of interest you pay on your credit card is the highest at 36-42% per annum if it is not serviced on time, so it makes sense to opt for a cheaper loan to repay this high cost debt as soon as you can. You could therefore consider a personal loan for a period of three years if you are in a position to service it. The interest rate you would pay for it would be in the range of 16-24%.
You could also opt for security backed loans such as a top up loan on your home loan or a gold loan. If you have a good track record in servicing your home loan, you will be eligible for a top up loan which is available at an interest rate of 12%. Similarly, if you have some gold jewelry stashed away in a locker, you could use it to get a gold loan at an interest rate 13-15%.
If you have other investments such as a fixed deposit, you may also opt for a loan against it. Such loans are available at a rate of interest that is one percent higher than what is offered on the investment itself. For instance, if you are earning a rate of interest of 9% on your FD, a loan against it will be available at a rate of 10%. Loans against other investments such as traditional life insurance policies, mutual funds, etc. are also available at similar rates. If you have accumulated a large debt pile, you can also think about liquidating some assets to pay off your credit card debt.
Negotiate for a lower rate of interest
If you feel that none of the above options are feasible for you, pay a visit to the bank and explain your financial situation to them. If you can convince them about your willingness and intention of repaying, chances are, that you can get a low interest rate or a flexible repayment schedule depending upon the bank’s policies. However, do consider the feasibility of the other options discussed above, before you think of doing this.
Cash is your best friend:
Till such time you have paid off your credit card dues, cut down on your expenses and live on cash. It’s a good idea to lock away your credit card till all the debt has been cleared on it. You will need to be patient as you atone for reckless financial behaviour, but this will probably serve as a lesson for a lifetime for you. Once you are in the pink of your financial health once again, you will feel good about your frugality.
A credit card debt pile can indeed be intimidating, so do be careful and responsible while using it in the first place. However, if things have gotten out of hand already, the above mentioned hacks can be used to get things back to normal. Once things are back in order, it is also recommended that you pull out your Cibil report. This is to ensure that your efforts to repay your debt are reflecting on your Cibil report and your Cibil score is in order.
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