Managing
Debt: How to pay off Credit Card Loan..!
By Mr. P Saravanan, IIM Shillong
Avoid revolving your credit, opt for balance
transfer of your outstanding amount and convert outstanding debt into EMI
option.
Credit cards are often described as a debt
trap when used uncontrollably, whereas if used smartly, it could provide you
free credit for certain period of time.
However, significant number of investors end
up with large sums outstanding on their cards and owing to higher rates of
interest they find it difficult to settle entire amount.
Let us discuss below, how to pay off your
credit card debt.
1. Pay more than minimum balance..!
Often investors are enticed by the revolving
credit facility offered by the bank. Under this, out of the total amount
outstanding one can pay just 5% and remaining outstanding can be carried
forward.
Such a revolving credit facility cost you up
to 40% per annum. Pay more than the minimum balance on each month.
If minimum payment required for that month is
say Rs. 2,000 try to pay back double or even more if possible.
2. Avail balance transfer facility..!
You can consider balance transfer or
transferring your outstanding amount from one card to another. Under this
scheme, you can shift your balance from one card to the other or / from
multiple cards to a single card.
The major advantage of balance transfer
option is that the second bank (who takes over your outstanding amount)
generally allows a credit-free period up to ninety days for easier repayment of
your pending amount.
3. Stop credit card spending..!
Another easy way is take out all credit cards
from your wallet, and leave them at home when you go for shopping. Avoid using
credit card, even if you earn cashback or other lucrative rewards with credit
card purchases. You should stop spending with your credit cards until your
finances are under control.
4. Use your bonuses to pay debt
If you receive any performance-based bonuses
or annual incentives, etc. use the same to pay off your credit card
outstanding.
Avoid the temptation to spend that bonus on a
vacation or buying any other luxury items. It is more important to keep your
house in order than that owing luxurious products.
5. Change your spending habits..!
Generally, your daily spending habits and
routines are the reason for getting into the debt trap. Avoid unnecessary
buying and ask yourself questions about how you spend money each day, each week
and each month.
Think of the possibilities of bringing your
lunch to work instead of buying it four times a week from the canteen.
Change your habits by asking yourself what
can I change without sacrificing my lifestyle too much and act accordingly.
6. Personal loan to pay off card debt..!
Try to avail an interest free loan from
friends or relatives and if you are not successful in that then you can go for
a personal loan and use that money to pay off the credit card outstanding.
For personal loans, interest will be in range
of 14-18%, but still you could save a lot as credit card companies charges you
around 35% on an annualised basis.
7. Convert outstanding into EMI..!
Another option is that you can convert your
outstanding debt into EMI option from the same bankers. Almost all the big
bankers provide an option to convert the credit card debt to EMI for tenures
ranging from three to 24 months.
The interest on the same can vary in between
18% to 24% depending on the banker. They will also charge a processing fees,
which will be one or two percent of the outstanding amount.
About the author
The writer Mr. P Saravanan is associate professor of finance
& accounting, IIM Shillong.
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