Santa Claus comes around just once a year. In the meantime, there are Credit Cards.
  • How to Come Out of a Credit Card Debt Trap

    Published on August 01 2017

    Credit cards are one of the most used financial products today. The popularity of this is such that credit cards can be attributed to creating a new revolution in the way finances work. This plastic card allows holders to borrow money on a credit to purchase goods and services and pay back the same every month. Credit cards also come with a number of offers and features such as dining discounts, fuel surcharge waiver and so on. However, for all the benefits offered by credit cards, if individuals do not pay their bills on time or do not use their card judiciously, it can result in their falling into a credit card debt, which is difficult to come out of. Falling into a credit card debt trap will also result in their credit score falling, making it difficult for them to procure loans or other credit cards in the future. However, it is not impossible.

    Credit Card Dept Trap
    Credit Card Dept Trap

    Steps to Follow to Come Out of a Credit Card Debt

    By following the steps given below, customers can come out of this debt.

    Credit Card Balance Transfer

    One of the options that customers can avail is to transfer their outstanding debts to another credit card. This is also a feasible option. They can either procure a new card for this purpose or they can use on of their other existing cards. When a new card is procured, a limited promotional period will be available during which the interest rate will either lower or will not be applicable on the balance that is transferred. The objective of this option is for customers to avail a certain limited period that usually ranges from 3 months to 6 months, in which finances can be worked out and the entire debt can be paid off.

    For example, certain credit cards from SBI will allow cardholders to procure a 60 day tenure at 0% rate of interest or a 6 months tenure at 1.7% rate of interest per month. However, it must be noted that the transferred balance will have the usual rate of interest applied after the promotional period ends. A number of credit card providers allow individuals to convert their transferred balance into Equated Monthly Installments or EMIs. Prior to opting for this choice, customers must first compare the benefits and offers, processing charges, rates of interest, duration of promotional period and other features prior to settling on one card for the purpose of balance transfer. It is always better to look around, research and compare prior to settling on one card.

    Fresh Loans at Lower Rates of Interest

    Another option that can be procured by customers is to raise a loan to pay off the credit card debt. Rate of interest on gold loans, personal loans or loans against bank fixed deposits and securities are relatively lower than the interest rates that are charged by credit cards. For example, interest rates on credit cards generally range from 25% to 30% whereas personal loans come at rate that is much lower, such as 12% to 25%. In case individuals are unable to procure personal loans due to low credit scores or income, they opt for gold loan or loan against securities.

    Conversion of Outstanding dues into EMIs

    This is another option that individuals can choose to come out of their credit card debt trap is to convert their outstanding balance into EMIs instead of transferring to another credit card or procuring another loan. Customers can convert their balance into EMIs of 3 to 12 months period, and usually at a rate of interest of about 18% per annum. However, it must be noted that a processing fee of 1.5% to 3% is charged for converting their outstanding balance into EMIs. If EMIs are not paid back by due dates, a standard credit card interest rate will be applicable on the balance amount.

    Redemption of Investments

    This option should be chosen only if liquidation of existing investments does not carry a high opportunity cost. For example, closing fixed deposit accounts for repaying a credit card debt is feasible only if interest rate applicable is not over 9%. This is lower than the rate of interest that will have to be paid even on alternative loan options such as gold loan, personal loan or an EMI conversion. On the other hand, redeeming equity mutual funds may result in a high opportunity cost especially during a bullish market trend. During such times, returns on equity investments can be as high as 20% or even higher making personal loans a much cheaper option.

    One of the fastest growing debts today is due to credit cards. Customers should always be careful when it comes to using their credit card and must always be aware of the bill that is being accumulated. Credit cards must only be used if it can be repaid comfortable at the end of the billing cycle. That being said however, there are instances when individuals fall into a credit card debt despite their best efforts. In such cases, any of the above options can be chosen and as much as possible, settlement should be avoided. Also, until the debt has been paid off, customers should not opt for fresh transactions on their card. Finally, customers must always study their credit report and work on enhancing their score. By following the above steps, customers can come out of their credit card debt soon.

    Why You Should Choose Credit Cards Over Debit Cards

    These days, people at least have one credit card and one debit card in their wallet. When you look at these cards, they are almost similar. However, the benefits each type of card offers is different. Although both are plastic money, have a 16-digit unique number, and works only when you enter the PIN, the way they function is different.

    While debit cards allow you to use your funds that you have in your bank account, credit cards allow you to borrow money from the bank/credit card company and allows you to repay it later. While using your debit card might ensure you do not fall into the debt trap, credit cards offers a lot of benefits.

    Most of the credit cards that are being issued in India are exclusively designed to offer discounts, cashback, coupons, and reward points that will benefit the cardholder, motivating them to use their credit card frequently. Yes. Credit cards have the potential to push you into the debt trap. However, if used wisely, it can be beneficial.

    Some Of The Reason Why You Should Choose Credit Cards Over Debit Cards

    • Credit cards help you buy expensive products on EMI without burning your savings account. You can use the funds you have in your bank account for other purposes and still buy things you love to own. Most credit card providers also offer No-Cost EMI these days, which means you do not have to pay any interest or additional charges when you convert a transaction to EMI.
    • Most of the credit cards come with a great loyalty program where cardholders can earn reward points on certain spends made on their card. Cardholders can use these reward points to claim free gifts, book flight tickets, buy selected merchandise, or even pay there credit card bill (depending on the type of card they own).
    • Credit cards also give reward points if you use your card to pay your utility bills. This way, you will land up saving while you spend!
    • If used wisely, credit cards help you build your credit score. Debit cards do not have the potential to help you build your credit score.
    • Some credit cards even provide additional benefits like extended warranty on some products purchased using your credit card. However, most cardholders are not aware of this feature and fail to use this benefit.
    • From time to time, credit card providers tie-up with retailers and offer exclusive discounts for their cardholders. Debit cards do not have these promotional offers.

    In conclusion, having both debit and credit cards are beneficial, if you use them wisely.

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