A credit card could offer several benefits in the form of reward points, discounts, cashback etc. However, irresponsible use of credit cards – spending carelessly without having the repayment capacity, missing your card bill payments or paying only the minimum amount – can lead to piling up of your credit card debt. Since credit card debt attracts heavy charges and penalties, it can lead to a financial crisis very quickly.
Unpaid dues along with fresh transactions made through the credit card would continue to attract heavy finance charges of around 40 percent p.a. till the time you repay the entire outstanding amount along with the charges and penalties.
Also, a credit card debt is likely to impact your credit score, too, which in turn will adversely affect your ability to borrow in the future. So, for example, a credit card debt can derail your life goal of buying your own house, as a poor credit score will reduce your ability to take a home loan.
Hence, it’s best to avoid a situation where your credit card debt goes out of hand. But in case you are stuck in such a situation, here are three solutions that may help you reduce the burden.
Convert outstanding balance into EMIs
Many credit card issuers offer the facility of converting your pending dues into EMIs. This way, you can repay the total amount in smaller chunks, over an extended period, as per your repayment capacity.
Do note that most banks will charge an interest rate for converting your outstanding amount, which will become a part of your EMIs. However, this interest rate on EMIs is likely to be much lower than the finance charges on your unpaid dues.
The interest rate though may vary according to the tenure you choose to repay the outstanding amount through EMIs. Always try and choose the shortest tenure possible according to your repayment capacity to reduce your interest outgo.
Balance transfer to another credit card provider
A balance transfer facility allows you to transfer your existing credit card dues to another credit card by a different Bank or credit card issuer that charges a lower rate of interest on the outstanding amount.
Sometimes, credit card issuers also offer a teaser rate on balance transfer wherein you have to pay a minimal interest rate for a particular period. If you can repay your entire credit card outstanding within this period, transferring your balance to another credit card issuer may be beneficial.
However, before choosing to make the balance transfer, do ensure that you check fees and charges associated with the new credit card. Also, compare offers that may be available for you from multiple banks, to choose the most suited one.
Take a personal loan at a lower rate of interest
Another option is to take a personal loan to pay off your credit card dues. This may be particularly helpful for those whose credit card debt is big. Usually, credit card providers charge an interest rate of around 40 percent p.a., whereas you can get a personal loan, starting from an interest rate of around 11 percent.
But not many who have a large outstanding debt would be eligible for a personal loan at low rates of interest. Those who are eligible, with their credit score not majorly impacted may choose to avail a personal loan. This will allow them to pay off their credit card debt in one single go. But they do need to repay the personal loan EMIs responsibly every month thereafter, to ensure they do not fall in a debt trap, again.