Buyers using credit need to be cautious of the fact that they don’t end up in a debt trap. Here are ways to manage debt better even while using a credit card.
With consumerism at full throttle and technology and other digital mediums opening up smoother ways to shop and spend on impulsive buying, the temptation to not swipe your credit card is fast losing its strength. Discount offers, cash back and attractive reward points are making the deal even sweeter and end up giving a win-win perception for all the stakeholders.
However, buyers using credit need to be cautious of the fact that they don’t end up in a debt trap. Over-dependence and mismanagement of credit card or for that matter any kind of loan should be avoided and not let them eat into your income.
Here are 10 lesser known things about credit card usage, knowing them will help you lead a debt-free life:
1. Cash withdrawals using credit cards
If hard pressed for funds, cash withdrawals using credit cards from ATM’s may look easy and simple but it should be done as a last resort. Unlike purchases, cash withdrawals do not get any interest-free period and the interest burden starts piling up from day one. There could a cash withdrawal fee as well.
2. Do not over leverage
Buying stuff on credit cards or loans means you are piling up debt. At times, you may have to revolve your credit if the entire dues do not get paid on time. But, still, if you have to then stick to a thumb rule of debt. Most financial planners suggest keeping your EMI’s around 45 per cent of your take-home pay. This includes all loans such as car loan, personal loans and even home loans. Over-leveraging could make you land-up in a soup if not managed well.
3. Do not revolve credit card dues
Make sure you end up paying the entire bill of the credit card well before or on the due date. Even if one is required to pay only the mandatory 5 per cent on the due date ( to avoid paying the late fee), choose to pay 100 per cent. By carrying forward the dues, one may have to pay an interest rate of 36-42 per cent per annum.
4. No free period if revolved
By rolling over, not only one has to pay a high-interest rate till the duration the dues get paid but also one loses the advantage of the interest-free period. Typically, all credit cards give 45-51 days free credit period on cards before the due date arrives, however, if the entire bill amount of the previous cycle has not been paid, this advantage is lost.
5. Have standing instructions
To ensure that the debt is paid the bank on time, give standing instructions to your banker and keep paying the entire balance on due date electronically through standing instructions or by setting up electronic clearing system (ECS). The debit mandate helps in managing debt efficiently.
6. Opt for EMI Option
If you had to make a big-ticket purchase on your card, opt for converting the amount into the EMIs with the same card issuer. The EMI option is at a lesser rate of interest of 12 per cent to 24 per cent than what you would have paid on the credit card.
7. Opt for balance transfer
If you have a heavy balance on your credit card and you have more than one card, you may opt for Balance Transfer of feature of cards. In doing so, the balance from the card is transferred to the other card at a lesser rate of interest. However, make sure to finish the debt as early as possible even after transferring.
8. Prepay home loan on regular basis
Servicing EMI of a home loan may not help you much as it is a long term loan and needs to be closed early to keep the interest burden lower. Plan and save funds to prepay on regular intervals an amount over and above your regular EMIs. Such prepayments are treated principal payments and will help in bringing down your principal outstanding.
9. Debt pay-off
If you have already piled up huge outstanding on credit card, make it your first priority to clear it off. Stop any further purchases on the card. Create a plan to pay off the dues as quickly as possible. This may take a few months but getting the loan off your back will help.
10. Credit history
Nowadays for any kind of loan, credit history is essential to get loans from banks. Building up a decent credit history helps. Take less of debt and do not keep outstanding running for long to have a better credit score.