Now that Diwali is behind us, it's time to review your credit card statements and take a firm control of your finances that may have gone awry due to overspending during the festive period.
After an unbridled spending spree, hefty bills and dues could be staring you in the face. So, what's the best way to tackle this debt, especially if financial constraints are looming?
Maximise reward points
Redeem reward points before your credit card bill is generated. You can also use cashback points to offset your debt, or pay bills using reward points, depending on your bank's policy.
If the bill is generated, redemption of reward points will be accounted for in the next billing cycle.
Consider switching to cheaper borrowing options
To manage debt, switch to a low-interest credit card or equated monthly installment (EMI) conversion through your lender's balance transfer facility. Secured personal loans tied to assets typically provide lower interest rates and more manageable EMIs, points out Adhil Shetty, BankBazaar Chief Executive Officer (CEO), advises,
Credit card EMI offers may seem appealing, but be cautious of interest rates that can soar between 15 and 22 per cent. Also, steep prepayment penalties may apply.
Home loan top-ups: cheaper, but carry limitations
Consider clearing debts with a top-up loan on your existing home loan, the cheapest option available. However, Shetty warns that lengthy sanction processes and repayment tenures can inflate interest costs, despite low rates. For instance, if you pay out the top-up amount of Rs 1 lakh over, say, 15 years, you may end up paying close to Rs 70,000 as interest even at 7.5 per cent.
Maximise the benefits of a top-up loan by setting aside monthly funds and prepaying within a year. This will result in substantial interest savings. Note that these loans are exclusive to existing home loan customers.
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Loans against investments
For those with steady cash flow, top-up and personal loans are viable options. However, if cash flow is a concern, consider leveraging your investments to secure funds at lower costs. For instance, loan against fixed deposits, mutual funds, life insurance policies and even gold can help you cut funding costs. Typically, these loans come in the form of an overdraft for a year or so. And banks are willing to offer these digitally and quickly.
“To clear credit card debt, tap into successful investments by selling equity or mutual fund units, or making partial withdrawals from insurance policies," said Aparna Ramachandra, Founder Director of rectifycredit.com.
Avoid app-based loans
Taking loans from fintech lenders is another option. There are several app-based lenders who offer deals in the form of fixed rate of interest. However, personal loans offering reducing monthly rate of interest work out to be cheaper. App-based loans are preferred by borrowers who have no or little past credit history or those with monthly salary of up to Rs 20,000. Other borrowers will most likely get better personal loan offers from banks than app based loans.
What should you do?
Before tackling outstanding credit card dues, review your loan agreement's terms and conditions. Next, consult your bank to explore repayment options and demonstrate your commitment to paying off the debt.
Study the terms and conditions, including interest rates, prepayment terms, and additional fees if you are taking a loan to settle dues. Take advantage of promotional offers, such as festival deals with reduced interest rates and waived processing fees. Maintaining a good credit score is crucial for favourable loan terms.
With your debt cleared, immediately start building wealth through a tailored investment plan for a secure financial future.
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