Most often people who are unable to clear their credit card debt opt for its settlement by the concerned banks. However, is it a good option?
Getting a credit card can arguably supersede most joys in life. You can immerse yourself in the pleasure of buying things you always wanted, or subscribing to services that almost always seemed overly priced. Whether it is buying an expensive gadget or going on that expensive holiday you’ve always wanted to take, a credit card can fulfil many of your life’s simple-yet-complex pleasures.
However, not everything that’s amusing can remain that way forever, can it? On the other side of the curtain is the perilous world of debt – an arena that mercilessly takes down even the most cautious of participants. Yes, being cautious can do you great good. But guess what? Being consistent and rigid in credit card usage isn’t something that a majority of people have effortlessly pulled off? If you’re a new addition to this world of enormous credit card debt, you’ve landed in a soup. But you’ve got options, boss!
Don’t let banks settle your credit card debt for you! What does this mean?
Letting the bank settle your credit card debt for you technically means that you’re negotiating with the bank to reduce the debt burden on your credit card, fundamentally because of your inability to honour your end of the repayment deal. This will amount to a large percentage of your debt being written off or waived off by the bank. In most cases, the interest is waived off along with a part of the principal amount.
Note: Banks don’t do this too often nor do they encourage this; but in certain situations, banks become obligated to do so.
This may seem like quite an amusing move – letting the bank settle your credit card debt for you after you’ve spent a king’s ransom buying things that once seemed exorbitant. Settling will essentially waive off the interest and a good chunk of the principal as well.
That said, going for a settlement is tantamount to disaster. Wondering why? We’ll find out!
Why do people opt for a settlement?
Quite unfortunately, as much as it seems distinctly gratifying to have a credit card (indubitably comes in handy when you have an emergency), the interest rate on credit cards literally racks the pain quotient.
Currently, an interest rate of at least 3% to 4% per month, adding up to a whopping 30% – 40% p.a., is massive and just doesn’t make sense. So having a credit card for several months without making timely repayments can drive your debt through the roof (a large chunk of this debt would be just the interest).
So, if you decide to settle and avoid paying the massive debt that has come to plague your rather smooth life, it will come at a cost – your credit score will take a sound beating.
The Impact on your credit score when you settle
Allowing a bank to settle your credit card debt is perhaps the worst idea, mostly because it severely impacts your CIBIL score. A good CIBIL score is generally the most essential prerequisite in getting future credit applications approved (personal loans, credit cards, car loans and home loans are amongst the most popular credit products, all of which look at your credit score before you can become eligible for the corresponding loan).
While we say this, let us not underestimate the effects of a bad credit score. A poor score erodes your chances of getting future loans for at least a few years. So if you find yourself in financial misfortune during this time, well, you’ll basically end up amidst the rags, in absolute shambles. Now that’s not what you want. Or is it?
Importance of a good CIBIL Score
A lot can be said about the importance of a good CIBIL score and a lot needn’t necessarily have to be said, simply because the importance is self-explanatory. Let’s drive past anyways.
Availing future loans
A lot many people out there do not consider the importance of a good CIBIL score and its impact in availing future loans. If there is one thing about life that makes it exciting as much as it makes it agonising, it is its unpredictability factor. You never know when you’ll be hit (and hit hard, mind you) by a financial emergency. Going by this, it’d be wise on your part not to discount the necessity of requiring to avail a loan in future, maybe in this case, necessitated by a financial emergency.
Personal loans are perhaps the ultimate saviour in times of financial emergencies. So, don’t underestimate the importance of having a good credit score and the possibility of requiring a personal loan in future. As a matter of fact, a bad credit score will jeopardize your chances of availing secured loans as well and not just unsecured loans. Car loans and home loans are the best examples of secured loans.
Alternatives to settling your credit card debt
Firstly, let’s reiterate the one point that banks will not agree to settle so easily. Technically, settling isn’t something that you can do because it is convenient. Once we’re clear on that, the next step demands finding an alternative – an alternative that will keep your interests intact while also not letting your credit score make a downward slide.
Secondly, if you didn’t know it already, there are two options that are available to you in situations like these: A Credit Card Balance Transfer Option and the option to Refinance your credit card with a Personal Loan. Both these options are by far brilliant alternatives to letting the bank settle your credit card dues for you.
Credit Card Balance Transfer Option
A credit card balance transfer is a procedure that involves transferring your entire outstanding debt on your current credit card to a new credit card at a lower interest rate that also accompanies a temporary interest-free period of about 6 months. For instance, if you have a credit card that you’ve maxed out and your minimum monthly payments don’t seem to be working well in reducing your debt burden, you can choose to transfer your outstanding amount on your credit card to a new credit card (offered by a different bank) and pay only the principal amount during the initial interest free period (usually 6 months as mentioned earlier).
The biggest advantage of opting for a balance transfer is a reduced rate of interest, not to forget, the interest-free period that tags along. Moreover, a balance transfer will give you an opportunity to improve your credit score as well, as during the interest free period, you are not necessarily obligated to make monthly payments.
Refinancing Credit Card Debt with a Personal Loan
Another move that symbolizes a stroke of brilliance is to refinance your credit card debt through a personal loan. Quite simple actually – you take a personal loan and pay off your credit card debt with it.
If your question is – why you should do this, it’s very simple. The annual interest rate on credit cards is about 40% p.a. while the average annual interest rate on personal loans is just 15% p.a. The interest gap is as massive as the APR on credit cards!
(By Aditya Kumar, Founder & CEO, Qbera.com)