Purchasing through credit cards can be beneficial if you can commit to spending within your capacity and pay off the dues on time. On the other hand, spending beyond what you can repay and inability to repay the bills by their due dates can land you in a debt trap.
Here some of the common mistakes you might be making that can land you in a debt trap:
Not paying the entire credit card bill
Credit card issuers levy steep finance charges of 24-49% p.a. on the unpaid proportion of credit card bills. They also revoke the interest-free period on fresh credit card transactions till the repayment of the unpaid credit card bill. Thus, non-payment of entire credit card bills for several consecutive months along with continued credit card spending during that period can lead you to a credit card debt.
The best way to deal with such situations is to convert the unserviceable component of the credit card bill. Opt for the EMI option if you are unable to service your credit card bill. The interest rate charged on such EMI conversion is much lower than the finance charges levied on unpaid credit card bills. The tenure of such EMI conversions can range anywhere between 3 and 60 months basis the card issuer. This allows you to choose EMI tenures based on the EMI repayment capacity.
Credit card issuers also allow card users to convert select transactions beyond a predetermined threshold amount into EMIs. Once the card holders convert their entire unpayable dues to EMIs, they can avail interest free period on fresh credit card transactions.
Just paying minimum amount due by the due date
Many credit card users wrongly believe that repaying the minimum amount due (MAD) mentioned in their credit card statement can save them from steep finance charges. While paying MAD would save you from incurring late payment fees of up to Rs 1,300 p.m. and avoid reduction in credit score, you would continue to incur finance charges on the unpaid credit card bill amount.
Using credit card to make ATM cash withdrawals
Credit card issuers charge finance charges on all the ATM cash withdrawals made through credit cards. They also levy a cash advance fee of up to 3.5% of the amount withdrawn. Card holders will continue to incur finance charges until they repay the entire amount withdrawn from ATMs.
Avoid ATM cash withdrawals through credit cards to the extent possible. If making ATM withdrawals become completely unavoidable, then make sure to repay the entire cash withdrawal as soon as possible.
Tips for getting out of credit debt trap
EMI conversion should always be the first response to save yourself from stepping into credit card debt trap. Having said that, you should also explore other options if the interest rates charged on EMI conversion and/or the quantum of the unpaid credit card dues are on the higher side. Here are some of the alternative options –
# Credit card balance transfer:
Many credit card issuers offer balance transfer options to the existing credit card users of other card issuers. This option allows card users to transfer their unpaid balance to another card issuer at lower or nil interest for a pre-specified period, usually up to 3 months. This period is also known as the promotional interest period. This option can be especially beneficial for those having the capacity to repay their entire unpaid dues within the specified promotional interest period. However, card issuers start levying usual finance charges on the unpaid proportion of the transferred balance after the expiry of the promotional interest period.
Some credit card issuers also allow the transferred balance to be converted to EMIs. This option would be helpful for those lacking the capacity to repay the entire transferred balance within the promotional interest period.
# Explore alternative loan options:
Personal loans, gold loans and top-up home loans (in case of existing home loan borrowers) can be availed for getting out of credit card debt traps. The interest rates charged by the lenders for personal loans, gold loans and top-up home loans are usually lower than the interest rates charged on EMI conversions. Hence, those being charged high interest rates for EMI conversions can consider these alternative loan options to reduce their overall interest cost. A reduced interest cost will increase their chances of getting out of their debt traps sooner.
(The author is Director, Paisabazaar.com)