- Credit card increases your purchasing power and lets you purchase things that you always wanted.
- But at the same time, reckless use of your credit can also land you in debt.
- Non-payment of your credit card bills or delay in payment will increase the interest burden which gradually creates a pile of debt.
Rohit is employed with a corporate in Gurgaon. When he started his job, he was approached by several banks for credit cards and currently he owns five credit cards. But as the number of credit cards increased so did his debt burden. And on top of that, he did not manage the repayment properly. All this led to a debt burden. Now he is looking forward to get a personal loan to pay off the balance on other cards. He also tried to apply for SBI card for transferring the balance but his application was rejected as the haphazardly managed debts had trashed his credit score.
Credit card increases your purchasing power and lets you purchase things that you always wanted. But at the same time, reckless use of your credit can also land you in debt. Non-payment of your credit card bills or delay in payment will increase the interest burden which gradually creates a pile of debt.
Reports show that the rate at which the debts of an average Indian household is increasing is quite alarming and people need to educate themselves on how to manage and reduce their debt burden. With credit cards being the most common type of debt, let us understand how you can manage an already huge pile of debt and how you can avoid such situations in future.
How to manage a huge pile of debt?
First of all, you need to make a good repayment strategy- one that allows you to finish off the debt as soon as possible. Set clear repayment goals and stick to the plan. Debts that are paid off randomly without much planning do not take much time in piling up again. So, you should follow the strategies given below to pay off your debt-
1- Pay off the card with lowest balance first
The lowest dues can be paid off easily and will also give you the confidence to stick to your repayment strategy as you can see the results in a short time. Make a list of your credit cards and total dues on them. Start with the lowest balance by making extra payments on it. Once it is paid off, you can start with the next lowest and in no time all your dues will be paid off.
2- Pay off the credit card with highest APR first
Credit card attracts the highest interest and this is the reason why despite making payments, your debt never reduces. Sort your cards according to Annual Percentage Rate (APR) and pay off the one with highest APR first and leave the low interest credit cards for later. This will help you save on the overall interest cost. Make a habit of paying some extra amount every month, say Rs. 2,000. Start small and increase the payment later.
3- Stop New Purchases
If you keep using your credit cards along with making payments, it will be extremely difficult to bring down the balances. So freeze the cards which you do not need. For example, you may use one credit card for paying the utility bills but the rest are shopping and travel cards. Avoid vacations for some time. Pay for the groceries in cash; keep the shopping cards out of your wallet when you go shopping in order to avoid impulsive purchases. If your credit card is connected to online stores, remove them. If possible, you can also shift recurring expenses to your debit cards. Lessen the use of your credit card and the debts will become more manageable. Also, it is a good practice to maintain at least 40 percent of your total credit limit free.
4- Consolidate Your Debts
It is difficult to manage multiple credit card debts at the same time. To save yourself from this messed up situation and to save on multiple interest costs, you should give debt consolidation a chance. One good way to consolidate the debts is to transfer multiple debts to a single card through credit card balance transfer. Some credit cards offer balance transfer facility with an interest-free period of say, six months while others offer lower interest than those on your existing credit cards. While balance transfer will consolidate your debt, it does not mean that you have paid off the entire amount. You should keep paying the amount on time. If possible, pay some extra every month.
Another way to bring scattered debts together is to take a personal loan. You can take the loan to pay off the debts on multiple cards and then you will be left with only one EMI, that is, on the personal loan. Although a single line of credit is easily manageable, you must make sure that you pay the dues on time. Non-payment or delay will again land you in debt due to heavy interest cost and penalty.
How to avoid debts from piling up?
Now that we have talked about how to get rid of a debt pile, we should also focus on how to avoid these debts from rising again. Follow these practices-
1- Clear your dues on or before time
Needless to say, you should pay your credit card bills on time. When bills are not paid on time, it will attract penalty for delay. One way out is to pay the minimum amount due. However, the outstanding balance in your account will keep earning interest; plus the new purchases that you make will not be eligible for interest-free period. Clearing all your dues on time will save you from interest cost as well as keep the debts from piling on.
2- Check your statements regularly
Keep checking your statements regularly to find out if there is any discrepancy. If you find any such mistakes in your statement, you should immediately contact your bank to correct the same. After all, why would you pay more than what you have actually spent?
3- Understand how it impacts your credit score
Bigger the debt, poorer will be your credit score. Your credit rating depends on the payment of your dues as well as your credit utilization ratio. You should pay all your dues on time and along with that you should maintain a reasonable credit on your card.
So, if you already have too much debt, it is high time that you start prioritizing your payments.
This post has been contributed by Paisabazaar.com.
Last Updated 4, Apr 2018, 7:11 PM IST