A version of this article was first published on the Financial Express
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.
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.
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.
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.
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.
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.
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.
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 to24 months. The interest on the same can vary in between 18-24% depending on the banker. They will also charge a processing fees, which will be one or two percent of the outstanding amount.
The writer is associate professor of finance & accounting, IIM Shillong.