Stop revolving credit card dues and replace with lower-cost debt

Personal loan, conversion to EMIs and secured loans are alternatives

Credit cards have become the quickest means to access credit, especially for the younger generation. According to the Reserve Bank of India data, the total number of credit cards in circulation increased by 18 per cent to 103.3 million in May 2024 from 87.4 million a year ago. Credit card spending in May 2024 increased by 17 per cent year-on-year (Y-o-Y) to Rs 1.65 trillion.

However, reckless use of credit cards can lead to debt troubles. “Credit cards demand responsible usage. Due to high interest rates, late payments on credit card bills can snowball, pushing you into a debt trap,” says Adhil Shetty, chief executive officer, BankBazaar.

 

High-cost borrowing

Credit card borrowings come at a high cost. “Always spend the money you have. If you don’t pay back your card dues on time, you could be charged an interest rate that could go up to 40 per cent or above on your due amount. Credit cards carry the highest rate among all credit products. Always use your credit card as you would a debit card,” says Sumanta Mandal, TechnoFino founder.

Spend wisely

Control your spending to avoid falling into a debt spiral. “Lack of self-control over spending leads to a credit card debt trap. People think they have money and spend using a credit card, but when it’s time to pay, they realise they don’t have the money,” says Mandal.

To escape a debt trap, do not increase your existing debt. “Don’t make new purchases using your card until you have paid off your outstanding debt. If you have multiple credit cards, prioritise your debts and pay off the ones attracting the highest interest,” says Shetty.

Avoid paying minimum dues

If you tend to make minimum due payments, curb this habit. The interest will continue to accrue on the outstanding balance, adding to your debt. “Settling the minimum payment each month might feel good, but it could be a costly mistake. Most of your payment will probably be used to cover interest charges, and the principal amount will only be partially reduced. You will end up accruing higher interest overall,” says Satish Mehta, founder of Athena CredXpert.

If crisis looms

If you are already facing a payment crisis, stop using your credit cards. “Stop taking any new debt. The aim is to get out of the debt trap, so accumulating more debt can be highly counterproductive,” says Mehta.

While personal loans are also costly, they are significantly cheaper (10.5 to 20.6 per cent) than credit card dues. “Take a personal loan to clear your card dues. Also, consider borrowing from family and paying dues,” says Mandal.

Consider juggling your dues between cards. “If you are using a high-interest credit card, explore balance transfer options to transfer your dues to a lower-interest card. You may also convert your existing outstanding credit card balance into affordable monthly equated monthly instalments (EMIs). However, a processing fee may apply. Alternatively, you can negotiate with your issuer to reduce the fees,” says Shetty.

If your card dues are high, take a loan against gold or fixed deposits (which are cheaper than personal loans) to pay off this loan.

Beware of consequences

Failing to pay on time hurts your credit score. “A default will result in a low credit score. You will face difficulties in availing a new loan because the lender will consider you a risky customer,” says Mehta.

 Choosing the best card for your needs

·       Pick a card that aligns with your spending habit

·       If the primary use is grocery shopping, opt for cards that give reward points at supermarkets; others offer reward points and cash back at restaurants, for frequent flying, and so on

·       Understand credit limits and compare interest rates on revolving credit

·       Understand annual fees, late payment fees, and other charges