Now that Diwali is over and your credit card bills are on the way – if you haven’t yet got them already – it’s time to take stock of your spending. Many of us may have overspent this festive season.
Having swiped your card rather indiscriminately, you face rather heavy bills and dues. How do you deal with this debt? Either accept the credit card equated monthly instalment (EMI) offer or pay a certain amount and roll over the outstanding balance to the subsequent billing cycle. Neither are the best options. So how do you cut your debt burden, especially if there is a salary cut or a job loss?
Monetise your reward points and cash back
If your credit card issuing bank has not yet generated the bill, you must redeem your reward points. Some banks also allow you to pay off credit card bills using your reward points. If you have cashback points accumulated over time, you can use these to pay off your credit card bills.
If your credit card bill is generated, any request initiated now will give credit in the next billing cycle. It will give you some delayed relief, though.
Credit card EMIs are the cheapest
Credit card EMI offers are the low-hanging fruits for borrowers with credit card outstanding. The rates can range between 15 and 22 percent. Also, there can be other dampeners such as high prepayment costs.
Transferring your outstanding balances to the credit card that offers the lowest rate of interest and longest interest-free period is one option. You can also convert your dues to an EMI by giving a call to your bank’s customer service. “However, both these options are still expensive compared to a secured personal loan. If you are able to get a personal loan against fixed deposits, insurance, against property, gold, etc. at a lower rate of interest and an affordable EMI, this could be your best option to pay off your debts,” says Adhil Shetty, CEO of BankBazaar.
Says Aparna Ramachandra, Founder Director of rectifycredit.com “It’s important to note that during this pandemic, there is a possibility of you not getting the EMI option at all from the bank that has issued your credit card. If the bank gives the option of EMI payment, then it would be for fewer months than you had applied for and the interest rate charges could be higher as per the repayment history of the customer.”
Home loan top-ups: cheaper, but carry limitations
You could also opt for a top-up loan on your existing home loan to clear your debts. While this is by far the cheapest and best option, there some caveats. “In the first place, home loans take a long time to get sanctioned. So, even if you take a top-up at a very low interest rate, the long tenor can mean a larger interest payout,” says Shetty. 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.
So, to make the most of a top-up, it would be wise to set aside funds every month and prepay the amount within a year to clear your dues. This will mean huge interest savings.
But these loans are only available to those currently paying EMIs on home loans.
Avoid app-based loans
Taking loans from fintech lenders is another option. Many a time, you come across app-based lenders offering deals in the form of fixed rate of interest. However, personal loans offering reducing monthly rate of interest works out to be cheaper. “App-based loans are preferred for people with 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 than-app based loans,” says Gaurav Gupta, founder and CEO of myloancare.in.
Loans against investments
Top-up loans and personal loans work for those who can pay regular EMIs with their cash flows. But if your cash flow is a problem, then see if you can raise funds against your own investments. Loan against fixed deposits, mutual funds, life insurance policies and even gold can help you cut funding costs. These loans typically come in the form of an overdraft for a year or so. And banks are willing to offer these digitally and quickly.
“As the equity market it doing well, you can book profits on your equity investments or sell some units from mutual fund schemes if they have performed well. You can also look at your insurance schemes where partial withdrawal is allowed. You can book profits from your investments and repay credit card dues,” says Ramachandra.
What should you do?
First, check your loan agreement’s terms and conditions. “Also, talk to your bank and discuss the repayment options available for outstanding credit card dues. Show your intent to repay and make it clear that you do not intend to default on your credit card dues,” says Ramachandra.
If you take a loan to repay the dues, you should especially focus on rate of interest, terms of pre-payment and other expenses. You can look at festival offers introduced by the banks, which have lowered interest rates and waived processing fees on loan products. A good credit score helps.
Once your loans are paid off, start off with an investment plan right away.