How to get out of the credit card trap?

Credit Cards | admin | September 13, 2011 at 5:20 am

Not paying your credit card dues is not always the best way to address your cash-crunch problem. Particularly, when the charges are as high as 2.95% per month, which translates into a whopping 42% p.a.

Borrowing through the credit card is one of the costliest ways to fund your expenditure. Even, interest rates on unsecured personal loans fades in comparison at a rate of around 18% p.a. Yet, around 40% of credit card users in India, according to an Amex survey, roll over their dues.

Consumers receive their card bills at the end of the billing cycle, popularly known as the statement date. The free credit period you get to repay your dues varies depending on when you made those purchases and statement date cycle of the card company. Under all circumstances, you won't earn a free credit of more than 50 days from a card company. And the card company gives you the option to either fully pay or at least partly pay your card balances (normally 5%). While there is nothing wrong with the former route, the trouble begins when you choose to roll over. For from that date, free credit ceases to exit and your card balances get charged at the prevailing rate, which can go upto 2.95% per month.

Thus if you are rolling over your credit card dues, the outstandings could snowball in just no time. And even after making payments, don't be surprised if your outstandings aren't coming down, for your partial payments might be just servicing interest.

Sitting on ballooning debt might have disastrous financial consequences for a person. A highly-leveraged person could wriggle out of higher debt by resorting to balance transfers. Balance transfers refers to shifting dues outstanding from one card issuing company to another.

Though a temporary remedy, it could help you buy time to arrange for your finances.

As of today, many card companies offer reduced interest rates as an incentive to transfer balances.

Credit cards issued by ICICI bank, SBI card and Standard Chartered Bank allow balance transfer at a reduced rate of 1.75% interest per month. However, this period is restricted to 6 months, after which normal rates apply. Yet, a cardholder, could end up saving quiet a decent sum.

To enumerate, by transferring balances worth Rs 50,000 to a new card with reduced interest of 1.75%, you could save Rs 4,044 over a six-month period. The procedure for such transfers is also quite easy with the whole process taking not more than 10 working days.

If you are a multiple cardholder, with huge card balances in multiple cards, one can also consolidate the card balances. This can be undertaken by transferring the maximum balance to the card with the lower interest rates and paying back the rest. Most card companies allow balance transfer to the extent of only 75% of your credit limit. So you might find that your entire balance is too large to fit into one low-interest rate card. In such cases, there might be no option but to pay at least the minimum amount due on all of your cards. Then, the excess money, if any, should be going towards repaying dues on the credit card with highest interest rates.

Also scout around for the card issuer with the lowest rates to save a bountiful on your interest expenses. Banks like HDFC Bank have off late reduced interest rates on credit cards. The new interest rates for HDFC International Gold and Silver Credit Card is a shade lower at 2.65% while the new balance transfer rates (for six months) on the latter is 1.65%. This could save you nearly 5% on an annual basis.

Another way to retire high-cost money, is by taking personal loans. Banks give personal loans up to Rs 10,00,000 without requirement of any security or guarantor. Though the interest rates on personal loans are generally higher (around 18% p.a.), you are still better off than rolling over credit card dues. These personal loans are repayable on an EMI (equated monthly installment) basis, which would be less of a burden. And many people opt for longer tenures (a maximum of 48 months) when they find the EMIs are higher.

There are advantages and disadvantages in such a step. The good part is that the interest rate that one is paying on the amount will be reduced thus providing some sort of relief. On the other hand this will ensure that the choice of the amount and period of repayment is taken out of the individual's control as at the end of every month there will have to be a payment amounting to the required sum.

Source: Economic Times