Know the basics
Nothing starts working well without understanding the basics; the customer should take care to understand basic terms and conditions by going through the fine print. Knowing basic terms like billing cycle, minimum amount due and grace period is indispensable for managing both spending and repayment patterns, and any negligence on our part could result in spiralling interest costs. Any sound repayment strategy starts with strong basics.
Stop erratic spending
Today, most purchases have become slicker than we might think due to the advent of shopping malls and online shopping marts, and as a result, we end up in a spending spree. A manageable debt always follows a controlled debt and, hence, it is imperative to stop sloppy spending habits. The above discussed points constitute the basic requirements to effectively plan and manage the repayment of credit card dues because even the best repayment strategies fail without good debt control.
Pay dues within the billing cycle
The first step is to ensure that the debt or the interest costs do not spiral out of control and a sure way to do this is to ensure that the entire outstanding amount is paid within the billing cycle or the provided grace period. This is easier said than done, but many card holders use this strategy effectively by timing their purchase and repayment within the billing cycle.
You could also become a convenience user by paying off all your bills within the grace period without any interest, but this option comes into effect only if the previous bill is also settled before the billing cycle or grace period.
Convert dues into EMIs
In case of big-ticket purchases, a cardholder can convert his purchases into equated monthly instalments. This option works like a consumer loan where the loan amount plus the interest component is converted into EMIs and repaid over a period of six to 24 months as monthly instalments. Not all purchases are eligible under this option: The total purchase has to cross a minimum threshold limit and, in some cases, the purchase has to be only from specified merchant outlets. The purchases have to be converted into EMI within 30 days of the date of purchase.
Most cards offer two options under this category: Low-interest option and interest-free option. Under the low-interest option, the interest rate charged is lower than the usual interest rate that would have been charged on the total purchase amount if the EMI option had not been exercised.
In case of zero-interest option, no interest is charged for the entire period during which the total amount is repaid by way of monthly instalments; only a big-ticket purchase from select merchants or a purchase above the minimum amount are eligible under this scheme. Generally under the zero-interest scheme the tenure is comparatively short.
In times of cash crunch, a cardholder can wisely opt for the balance transfer facility. Under this facility, the outstanding balance in one card is transferred to another card issued by a different bank at a lower interest rate.
A balance transfer is often done either to avail a lower interest rate and, thereby, curtail spiralling interest cost or to consolidate the total outstanding amount under a single card to make it more manageable. The flip side of this facility is that the low interest rate is available only for the initial few months, and the account reverts to the prevailing normal interest rate after 3-6 months.
Generally, a processing fee of 1-2 % is charged on the transfer, and it usually takes 7-10 days for the balance to get transferred. Besides, the amount that can be transferred is generally restricted to 75% of the total limit available in the new card. The cardholder shouldnt have failed to pay the minimum amount due under both the cards during the time of transfer. Some cards do offer the option of paying the amount transferred in EMIs like the SBI credit card.
Under extreme cases when the debt hits the ceiling, the best option would be to repay the entire amount with a personal loan. Personal loans offer lower interest rates compared to credit cards and are better manageable with regular EMIs. But credit card dues need not be paid always through the personal loan route, a controlled spending pattern and a well planned repayment strategy would ensure a well managed debt.
The credit card should be used as an instrument to leverage cash flows, and this depends on how we develop the habit of spending responsibly and prudently.
The writer is chief executive officer, BankBazaar.com