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Are you in a credit card debt? Read this! - Outside View by PersonalFN

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Are you in a credit card debt? Read this!
Feb 20, 2014

In recent times, the use of credit card has increased drastically. If you ask people from older generations about their credit card usage; you will realise that they probably didn't even own a credit card, or even if they did, then used it only for emergencies. But that was then - in the past. Among the many customs and trends that have undergone a change over the last few years in the country, credit card usage probably ranks very high. Swayed by the consumerism in the country, many individuals own multiple credit cards and swipe them rampantly. The urge of owning things on credit and enjoying a lavish life style, has got many under a credit card debt trap. As soon as the minimum amount or a part of the amount is defrayed, users get exposed to a stupendously high interest rate. People don't realise when their "little" purchases become too many, and gets them into a debt trap.

So coming to the rescue of such individuals, we have mentioned some points which can enable you to reduce your credit card debt wisely-

  1. Assess all your dues: The first step towards elimination of your credit card debt is to evaluate all your obligations. Hence you must make note of all the credit cards you own, analyse your online accounts and paper bills and the interest rates applicable on each card etc. This will help you to determine the total amount you owe and the cards that bear the highest rate of interest. Once you have obtained this figure, you must start paying off all the high rate dues with low interest loans. This will help you save money on interest payments. Create a plan to repay your dues and classify the ones you will need to clear first. This will give you a clear picture of your future course of action.

  2. Renegotiate interest rates: You can try to reduce the interest rate you are paying on your credit card by interacting with each credit card company. Even if you manage to reduce the rate by a small percentage, it can help you save a huge amount on interest payments. The companies may or may not renegotiate interest rates, but you must ask them as there is no harm in trying.

  3. Create a budget to pay off credit card dues: Track all your monthly inflows and outflows. If your outflows leave you with very little to save and repay your credit card dues, then it is high time you started monitoring your spending habits. Establish a monthly budget for all your expenses and be determined to follow it. Curtail all the unnecessary expenditures and save wherever you can. This might mean reducing all the outings and even rationalising on the necessities such as electricity and telephone bills etc. It goes without saying; don't add on to your debt by shopping more on credit cards etc. Having extra credit can sometimes create a feeling of having access to large sums of money and can lead us to buy things that we really can't afford. Keep track of every small expense, as it is these small expenses that often amount to big bills. In order to boost your monthly inflows and pay off your credit card dues faster, you may also consider finding an additional source of income. This could be done by working part time or encouraging your spouse to find a job or a source of income. Moreover, any windfall gains such as lottery winnings, lawsuit judgments, large inheritances, divorce settlements etc. must be deployed towards reducing your dues.

  4. Implement your strategy: Once you have determined a method to budget your expenses and pay off your dues, you must start implementing the same. Do not delay or procrastinate these payments as the debt amount keeps increasing. It is also prudent to keep a track of your progress. You must revisit your finances in a disciplined manner to ensure that you have not deviated from the planned course of action.
By adopting the above mentioned steps you can get rid of sleepless nights and live a stress-free life. However you should never be reluctant to seek the guidance of an expert if you feel matters are getting out of hand.

For those who don't own a credit card as yet, but are thinking of gaining possession of one, remember that rather than making fences later it is prudent to be cautious right from the beginning. Keep the following points in mind before using a credit card:

  • Terms and conditions: Read all the terms and conditions carefully before you opt for a credit card. If you find anything in the terms and conditions of the credit card that was not conveyed to you or is contrary to what was conveyed to you, then seek a clarification from the bank. If you are not satisfied with the clarification, cancel the card.

  • Annual Fees: It is important to be aware of the amount of annual fees that the company is going to charge you each year. Some companies also issue 'life time free cards' i.e. no annual fees are charged. However, its best to double-check with the company what the executive has promised you about all annual fees being waived off.

  • Minimum payment due: This is the minimum amount that you must pay for the purchases done in that month so as to not attract a penalty for default on payment of card dues. We would recommend that you pay the entire sum as carrying forward your payment to the next monthly cycle; will lead to a higher amount due on account of high interest rates plus taxes levied on the credit card.

  • Payment by EMI: On the same lines, whenever you make a large purchase (usually over Rs 10,000, although the amount varies across banks) you may get an offer from the bank to opt for the EMI (equated monthly instalment) facility to make the payment. Again pay the EMI amount in the credit card bill in full, along with the other things you've shopped for or paid for. So to simply put, pay your credit card bill in totality before the due date in one go. Also ideally, give the EMI facility a miss as the interest on the EMI can be exorbitant.

  • Borrowing cash is expensive: Credit cards can be used for making purchases on credit as also for borrowing cash. While making purchases on your credit card (so long as you pay on time) is okay, borrowing cash on your credit card is a very expensive affair and hence must be avoided.

  • Insurance benefit: Many credit cards are known to offer an insurance cover. We recommend that you ignore this benefit and go for the core offering - credit card. If the card has features that suit you, then you can opt for it even if there is no insurance cover. This insurance cover is unlikely to be sufficient for you and more often than not is linked with quite many terms and conditions and may be difficult to claim.
Remember, in case you find yourself incapable of paying the dues then it will be wise to cancel your card or stash it in some place so that you are not compelled to use the same. Owning multiple credit cards, in such cases will definitely be inviting a debt storm. PersonalFN believes that owning a credit card is not a bad thing as long as you know the means to service your dues.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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