• How to deal Credit Card Debt using Personal Loans

    If you have been struggling to pay your credit card dues, you can consider taking a personal loan to clear off your debts. A personal loan will allow you to repay the loan amount in flexible repayment tenures and EMIs. It will also help you save money on the high interest that you may have been paying on your credit card.

    In the below section, we have explained how you can use personal loans to clear your credit card dues through a method known as debt consolidation.

    What is Debt Consolidation?

    It’s when you bring together all your outstanding debt from various sources under one single head – and owe one party a large sum instead of owing multiple parties smaller sums. Managing one source of outstanding debt is much, much easier than having to field five or six of them.

    Let’s understand debt consolidation using the below-given example:

    Mr. Babu had accumulated 6 credit cards over the 3 years of his corporate employment. Banks just kept approaching him and offering him credit cards for which he was “pre-approved”. He had one petrol-card which gave him rewards if he used it at petrol bunks, one shopping-card that gave him discounts and offers at select merchants, one air-miles card which credited a lot of potentially free travel miles if he used it to buy air tickets, and 3 general use credit cards.

    Around 6 months in, Mr. Babu had accumulated around Rs.4 lakh in credit card debt which was being easily managed, as Mr. Babu is a man of financial discipline, and was meeting all his payments on time, every time. His salary was sufficient to meet payments due, and he was able to rotate his funds between salary, debt repayment, and managing his own lifestyle. A few months later he had brought his debt down to Rs.2 lakh through regular payments.

    But one fateful day, Mr. Babu was informed that he has been terminated from his job. Since Mr. Babu was managing his finances through a cycle of debt – this would affect him in the worst way. That month, Mr. Babu couldn’t meet his monthly credit card due and was subsequently charged with penalty interest and charged for missing payments – by 6 different banks! His total outstanding went from Rs.2 lakh to Rs.3 lakh just in that one month. That’s when Mr. Babu realised the following:

    • Credit card interest is charged monthly.
    • Penalty interest on credit card overdue payments that have not been made are compounding in nature.
    • Penalty charges for unpaid credit card dues in any given month are sometimes charged as a percentage of the outstanding amount.
    • Different banks charge different interest rates and have their own penalty charges.
    • Without a monthly income or an absolutely guaranteed source of funds, managing credit card debt is literally impossible.

    Two months down the line Mr. Babu got another job, still reeling from the fact that his savings could only get him the basic necessities like food and somehow manage to cover his rent. He was also constantly being bombarded by calls from the 6 banks and their recovery agents requesting and sometimes threatening him with consequences if he didn’t repay the debt.

    Even though he had a steady job with a monthly income again, he ended up owing way more than he had borrowed, thanks to penalty interest and charges. His debt was now close to Rs.5 lakh, and it was only increasing because his monthly payments were only covering the interest and penalty interest portion of the monthly charges – for all 6 banks. All his earnings were only going towards paying off interest and not the principal outstanding on which the interest was being charged.

    A few hours with a calculator on a gloomy Saturday evening helped Mr. Babu realise his mistake – he was paying off 6 different types of debt for 6 different cards with 6 different interest rates and 6 different penalty rates. And he also realised that even if he continued making payments the same way for another 10 years, his principal outstanding amount would still be the same, as he was only paying off the monthly interest that keeps coming back. That’s when he decided to opt for debt consolidation.

    He approached a bank and took out a personal loan for Rs.5 lakh, which he used to pay off and close all his credit cards. All the debt was clear from 6 different places and was now channelled into one loan. 6 credit card debts became 1 loan debt. He had successfully consolidated his debt under one single heading.

    Benefits of Taking a Personal Loan to Pay off Your Credit Card Debt

    • Lower rate of interest: Personal loan interest rates are among the highest of any loan category, but are still lower than the average rate of interest on credit cards. The actual interest Mr. Babu was paying (including penalty interest) for his 6 cards was around 40% on average, but his new personal loan only charged him 18% interest annually.
    • Tenure options: Personal loans, unlike credit cards, allow you to choose the duration of the repayment tenure. In Mr. Babu’s case, he was unable to repay his Rs.5 lakh outstanding loan in 1 year, so he opted for a comfortable 3-year loan tenure in which he would easily be able to make small monthly payments and eventually clear off all his debt. Credit card purchases allow a certain amount of control over the tenure of the repayment, but not as much flexibility as a personal loan.
    • EMI options: Directly related to the flexibility in choosing the tenure, personal loans also offer the flexibility to choose and EMI amount that’s affordable. Picking the right EMI amount is almost as important as the planning that goes into taking the loan in the first place. In Mr. Babu’s case, he opted for a smaller EMI but a longer tenure in order to clear out his debt with minimal tension.
    • Enhances Your Credit Score: Having a lot of credit card debt can affect your credit score badly and hamper your chances of securing a loan in future. So, if you are unable to pay your credit card dues, it is a good idea to take a personal loan. Once you do that, you can repay the loan in comfortable EMIs which will, in turn, enhance your credit score.
    • One source of debt: Owing money to 6 different lenders is very difficult to manage and keep track of. One of the most important benefits of debt consolidation is that a person in debt can bring all his outstanding debt under one source. It’s always better to minimize the number of parties involved in any debt related financial scenario, as it helps maintain transparency and clarity in the entire process from borrowing to repayment.

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