Many credit cardholders consider their credit card limit as an extension of their purchasing power. The attractive reward points, cashback, discounts etc. on credit card transactions also entice many to spend beyond their means. As they start defaulting on their bill repayments, their outstanding balances start growing at a rapid pace due to the high interest rate (as high as 47% p.a.) and late payment fees.
Here is a list of 5 debt management ways to pull out of the burgeoning credit card debt.
Card issuers usually allow conversion of the existing credit card outstanding into EMIs. They also allow card holders to convert specific transactions beyond a threshold limit into EMIs. While the finance charges (interest rate) on unpaid balances range between 18% and 47% per annum, interest rates of such EMIs range between 12% and 24%. Thus, conversion of outstanding dues to EMIs can lead to a drastic reduction of the overall interest cost. As the tenure of such EMIs can range anywhere from 3 to 48 months, card holders get the option to choose comfortable EMI based on their expected cash inflows.
This option allows cardholder to transfer outstanding balances of his existing credit card(s) to another credit card at lower finance charges (interest rate). This is especially helpful if the existing card issuer refuses to convert the dues into EMIs or charge higher interest rate for it. The transferee card can be a fresh credit card or one of the existing credit cards. The issuer of the transferee card usually offers promotional interest period, during which it charges lower or even 0% interest rate on the balance transferred. The duration of such promotional period usually ranges between 2 and 6 months. Lower or nil interest rate slows down or stops the accrual of finance charges for a limited period, providing the card holder a window period to save money and arrange funds for the repayment of transferred balance. Once the promotional interest period expires, unpaid transferred balance starts attracting usual finance charges of the transferee card. Some card issuers also allow the transferred balance to be converted into EMIs, the tenures of which can range anywhere from 3 months to 48 months.
Balance transfer option comes with processing fee of up to 2% of the transferred balance. They also charge prepayment fee of up to 3% on making prepayment in the EMI facility. Remember that the interest-free period on fresh transactions will stand withdrawn till the repayment of the entire transferred balance. However, the interest-free period continues to be valid if the balance is transferred on EMI basis.
Interest rates of personal loan, gold loan etc. are much lower than the finance charges of credit cards. For example, credit card issuers levy finance charges ranging between 18% and 48%, whereas personal loan interest rates range between 11% and 24%, depending on the credit score, monthly income, employer’s profile and other eligibility criteria. The tenure of personal loans can go up to 5 years, thereby reducing financial strain. Those having existing home loans can avail a top-up loan at even lower rates for a longer tenure. Those unable to avail a personal loan due to low credit score can opt for secured loans like a gold loan or a loan against securities as their interest rates are much lower than credit card finance charges.
Finance charges of unpaid credit card balances are way higher than the interest rates applicable on fixed income products like bank deposits, debt funds, bonds, etc. Thus, a person reeling under the credit card debt would save more money by redeeming such low-yield investments for paying off unpaid credit card balances. However, while doing so, do not touch the ones earmarked for emergency fund or short-term goals. Instead, opt for fresh loans or balance transfer option at lower interest rates.
Redeeming long-term investments to pay off credit card debt might hinder the achievement of your long-term financial goals. Doing so might also force you to avail costly loans in the future. Redeeming long-term market-linked investments may also lead you to book losses during market correction or pay stiff opportunity costs during bullish market conditions. Hence, instead of redeeming such long-term financial investments, use them as collateral to avail a loan against securities as the interest rates on such loans are much lower than the finance charges. Loan against securities will allow you to raise low-cost funds to pay off your high cost credit card debt without sacrificing your long-term financial goals.
(The author is Head of Payment Products, Paisabazaar.com)