Fallen into a credit card debt trap? Here are strategies to pay off your debt

If a person doesn’t have the ability to fully settle the credit card dues, one can adapt a laddering strategy.

Indians are borrowing more, if statistics from the Reserve Bank of India (RBI) and credit rating agencies are anything to go by. And that cuts across gender, given the higher participation of women in the workforce compared with a few decades ago. According to CRIF High Mark, a credit bureau in India, outstanding personal loans for women borrowers rose 35 percent to Rs 10.05 crore in December 2022 from Rs 7.5 crore in December 2021. Outstanding credit card debt, an insidious kind of liability, has also consistently gone up.

For instance, in 2019, Aarti Gupta, 27, a digital marketing professional residing in Delhi, had a credit card debt of Rs 90,000 because of her expensive lifestyle in her early 20s. While working in Gurugram for one year and staying away from the family, she stayed in a lavish rented flat. Gupta says, “My monthly income was Rs 40,000 and out of this, Rs 15,000 would go in rent and an additional Rs 7,000 on utility bills.” She adds, "I was finding it hard to keep up with the recurring monthly expenses because of my spending habits.”

Gupta says that she lived from pay cheque to pay cheque because of her expensive tastes. When the monthly salary didn’t suffice, she took to swiping her credit card liberally for all things, whether it was shopping, dining or travelling, with the result that the larger part of her salary went towards paying credit card bills.

During the COVID-19 lockdown, Gupta lost her job. That was her lowest point.

Like Gupta, several millennials fall into credit card debt because of outstanding dues.

Aarti Gupta, 27, a digital marketing professional had a credit card debt of Rs 90,000 because of her expensive lifestyle.

Credit cards dues can adversely affect you

Meena Kelkar, 47, residing in Pune and working at a vocational training institute, started using credit cards in her 40s.

She used multiple cards for shopping because they offered several benefits in the form of reward points, discounts, cashback, etc. Kelkar says, “I started spending without thinking how I’d repay my bills.” She adds that she only paid the minimum amount due and started missing settling her credit card bills occasionally, because her salary got delayed too, due to the slowdown induced by COVID-19.

Opting to pay the minimum amount due is a typical scenario when the cash situation is tight. But the problem is that credit card debt attracts almost usurious interest rate charges and penalties. It is little wonder, then, that Kelkar, too, fell into a debt trap. Outstanding dues were Rs 2.5 lakh in June 2020. She finally settled her outstanding dues in November 2022.

“Unpaid dues along with fresh transactions made through the credit card would continue to attract heavy finance charges of around 40 percent per annum till the time you repay the entire outstanding amount along with the charges and penalties,” says Sachin Vasudeva, director and business head of credit cards, Paisabazaar.com.

Moreover, a record of delayed or unpaid card dues can have larger financial ramifications. Kelkar realised much later that her credit card debt derailed her plans to buy a house; a poor credit score reduces your loan eligibility. Banks charge higher interest rates for those with a lower credit score, and unsettled credit card dues take away from a person’s creditworthiness.

If you too are in a debt trap, then here are ways how to get out of credit card debt.

Discuss repayment option with your bank

First, check your card-issuing bank’s terms and conditions. “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 Aparna Ramachandra, founder-director of rectifycredit.com.

If you take a personal loan to repay the dues, you should especially focus on the rate of interest, terms of prepayment and other expenses.

Appoint a credit counsellor

Consult a credit counsellor. For instance, Gupta approached FREED, a platform that helps people resolve their debt issues. “We work with borrowers, banks and other lenders to chart out a repayment plan so that individuals can clear their loans and start off on a clean slate. The aim is to repay, not seek a pardon from debt,” says Ritesh Srivastava, CEO of FREED.

Srivastava say that after they assess a debtor’s profile, they make a plan to chanellise her savings, every month in such a way that they set aside a sum of money every month in a systematic way. These savings are then used to clear debts, slowly and surely.

“After appointing a credit counsellor, in the timeframe of 24 months, I managed to save and settle the credit card dues,” says Gupta. She adds saving money every month instils financial discipline.

Remember, credit counsellors only help those who have the ability to repay but may not really know how to. Credit counsellors are not there to pardon the debt and let you go scot-free. Your overall debt may come down due to negotiations between you and your bank that your credit counsellor helps with, but you must clear as much debt as you can.

Strategies to pay off credit card debt

If a person doesn’t have the ability to fully settle the credit card dues, one can adapt a laddering strategy. “In laddering strategy, you need to lay out all the credit card outstandings from the lowest rate to the highest rate and first pay off credit card debt with the highest interest rate,” says Shyam Sunder, managing director, PeakAlpha Investment Services.

Some options to raise money include selling underperforming investments in your portfolio or using credit from cheaper sources such as loans against gold or investments. The interest rates on loan against gold or investments are not going to be as high as that on credit card debt. It makes sense to take a secured loan and use that debt to pay down credit card outstandings, then service the secured loan whose rates will be correspondingly lower.

“If you have a lump-sum amount from an annual bonus or proceeds from investments on maturity, pay down credit card outstanding as interest cost is higher compared to returns you may earn on any investments,” says Sunder.

Take a personal loan at a lower rate of interest

This is not really the best option because financial prudence says that you mustn’t take a loan to repay another loan. But if you use it well, it is one of the options to come out of a debt trap.

“Usually, credit card providers charge an interest rate of around 40 percent per annum, whereas you can get a personal loan starting from an interest rate of around 11 percent,” says Vasudeva. He adds, however, that borrowers who have a large outstanding debt would not be eligible for a personal loan at low rates of interest. Those who are eligible, with their credit score not majorly affected, may choose to take this route.

Cut down your credit card use

Gupta and Kelkar have now stopped swiping their cards.

It’s logical to close those idle credit card accounts. It’s important to select the right credit cards for cancelling. So choose credit cards that charge hefty annual fees and have high interest charges to get rid of first.

“Avoid cancelling a credit card that has a long credit history. This is because long tenure of timely repayments of due amount positively contributes to your credit score. Higher credit score is desired by lenders when you apply for a home loan, car loan, etc.,” says Parijat Garg, a digital lending consultant.

Gupta says, “I avoid spending money on unwanted things. Now I am saving 70 percent of the monthly income.” She adds that her only motive is to save money for higher education. “Whatever money blunders I have made in my early 20s, I am now trying to correct it.”

Kelkar says, “I now differentiate between needs and wants and am keeping a regular check on my monthly expenses.”