Published on Tue, Jul 12, 2005 at 12:27 | Source : Moneycontrol.com
Updated at Tue, Jul 12, 2005 at 12:47
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How to use your card, but still avoid debt
When it comes to credit cards, more isn't better! If you have more credit cards in your wallet than cash, you are probably in a debt trap by now. Moneycontrol tells you how to get your act together.
Certified Financial Planner, Kartik Jhaveri indicates, that ideally out of your total monthly cash outflow, not more than 20-30% should be towards debt repayment. Now this includes good debt like home loans and education loans. So if you've crossed this benchmark thanks to too much credit card dues, it means you need to crack down.
Here are 4 ways to bring down your credit card dues.
1) Consolidate If you are the owner of multiple cards, cut that extra flab. Every card available in the market serves as much purpose as the card next to it. Consolidate your cards. Transfer balances of high cost credit cards to lower cost ones. Look for schemes that offer low cost transfers.
For instance, Citibank is currently offering a balance transfer option wherein you can transfer your dues from another card to its own at a discounted rate of interest of 1.75% against the regular 2.95% per month. HSBC credit cards is offering a 3-month waiver of interest on transferred balances.
Transfer schemes: A. Convert your credit card dues to EMIs Your dues get converted to a loan at lower interest rate. You repay in EMIs. However, you cannot prepay.
B. Transfer balance at lower interest The new card will allow you to repay old debt at lower interest. However, there will be a time limit for doing this. Also, your new purchases will not get benefit of grace period.
Catch phrase: When you transfer balances, be prepared to pay annual fees and transfer fees. Also be prepared to forego any reward points on the transferred balance. Also remember that the lower interest rate applies only for a few months. After that you will be back to paying the regular interest. For example, in case of ICICI Bank's credit card, this facility is available only for 6 months. So essentially, transfer balances only if you will benefit after taking into account these costs.
2) Substitute your credit card outstanding with low cost loans A credit card outstanding can cost you up to 40% as interest. Even a personal loan at 18% is cheaper than that. Look for lower cost alternatives like personal loans. Check if your employer is giving you an interest free loan. These can substantially cut costs.
3) Don't pile on new credit When you carry a balance from month to month, there is no grace period on new purchases with most cards. For instance, a clause in Citibank's agreement reads 'the interest free credit period could range from 30 to 50 days. However, this is not applicable if the previous month's balance has not been cleared in full or if the cardmember has availed of cash from ATM'. HSBC has a similar clause. So if you make a new purchase on a card that already has an outstanding, the interest will be calculated from the date of purchase itself.
This holds true even in case of transferred balances. Suppose you have transferred balance from one card to another, so long as you continue repaying the transferred balance, you will not get grace period on your new credit.
4) Keep away from cash advances Cash advances are expensive. Stay away from making cash withdrawals on your credit card. You will pay a transaction fee of 2.5 to 3% of the advanced amount plus an interest rate of 2.95% per month on the dues.
