Credit cards are an excellent financial instrument for accessing instant credit and for saving money through cash backs, discounts, reward points, no cost EMI offers, etc. However, in order to make the most of our credit cards, we should to be able to identify signs which show that we are falling into a debt trap.
Here are three such mistakes that can land you in a credit card debt trap:
Mistake 1 – Not repaying the entire credit card bill
Card issuers levy steep finance charges anywhere between 24% and 49% p.a. on the unpaid credit card dues. In addition to this, they can also withdraw the interest-free period on fresh credit card transactions until the outstanding dues are repaid in full. All fresh card transactions start to accrue finance charges right from their transaction date. Thus, non-repayment of the entire credit card dues for consecutive months, along with frequent transactions during this period, can result in steep increase in credit card debt.
One of the best ways to manage your credit card debt is to convert the unserviceable bill component into EMIs. The interest rate charged on such EMI conversions are way lower than finance charges levied on the unpaid dues.
Moreover, the tenure of such EMI conversions can range anywhere between 3 months and 60 months, depending on the card issuer. These allow credit card users to repay their dues at lower interest cost as per their repayment capacity. Moreover, the interest-free period on fresh credit card transactions also remains applicable once you convert the unpaid dues into EMIs.
Mistake 2 – Only repaying the minimum amount due (MAD)
Many credit card holders wrongly believe that repaying just the minimum amount due amount mentioned in their card statement would save them from attracting finance charges. However, repayment of the minimum amount due would only save you from incurring late payment charges of a certain amount per month and any negative impact on their credit score. Credit card users would continue to incur finance charges on the unpaid card bill amount.
Mistake 3 – Using credit card for making ATM cash withdrawals
Card issuers levy finance charges on ATM cash withdrawals through credit cards. Cardholders would continue to incur finance charges until they repay the withdrawn amount. Additionally, card issuers also levy cash withdrawal charges of up to 3.5% of the withdrawn amount. Hence, avoid ATM cash withdrawals through your credit card to the extent possible. In case, such withdrawals become unavoidable, try to repay the entire amount as early as possible.
How to pull yourself out of the debt trap:
For those unable to repay their dues on time, opting for the EMI conversion facility should be the first option to escape the credit card debt trap. However, you can also explore alternative financing options in case the rate of interest levied on EMI conversion option is on the higher end.
# Credit card balance transfer
Many card issuers extend the option of balance transfer to the existing card holders of other credit card issuers. This allows you to transfer the unpaid balance to another credit card issuer, at relatively lower or no interest for a predetermined period, usually up to three months. This specific period is popularly known as promotional interest period.
Credit card issuers start charging usual finance charges on the unpaid portion of the transferred amount once the promotional interest period is over. Hence, the balance transfer option would suit card holders having the capacity to repay unpaid credit card dues within the specified promotional interest period.
Some credit card issuers also allow the transferred balance to be converted into EMIs. This option would particularly suit those lacking the capacity to repay the entire balance within the promotional interest period.
# Check out alternative credit options
Credit card holders can also avail personal loan, top-up home loan and gold loan to pull themselves out of the debt trap. The interest rate charged by the lenders on such loan options are generally lower than the rates charged on credit card EMI conversions. A reduced interest cost can enhance your chance of getting rid of a debt trap.
Sahil Arora -The author is Senior Director, Paisabazaar.com ,TFE
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