Paying your Credit Card dues on time is a good financial practice. But, missing even a single payment could land you in hot water. Once you are in debt, you’ll find that it multiplies faster than rabbits. If you find yourself struggling with debt on more than one Credit Card, and you’re considering taking out a Personal Loan to pay off your dues, you’ve come to the right place. We’ll help you find a way to deal with your situation.
Expensive Line of Credit
Credit Cards are one of the most expensive lines of credit available in the market today. The annual percentage rate (APR) for most cards hover anywhere between 30% to 40%. This could spell bad news if you’ve only been paying the minimum amount due on your Credit Card each month.
Before we proceed further, let us look into a scenario where Nilesh Gupta, a Delhi-based businessman, uses three different Credit cards. He has been repaying only the minimum amount due on each card for the last four months. He is finding it difficult to manage his finances and wants to clear all his debt. The finance charges on these cards are as follows:
| Card A | Card B | Card C | |
| Balance Outstanding (in Rs.) | 40,000 | 35,000 | 25,000 |
| Minimum amount due (5% of balance outstanding) | 2,000 | 1,750 | 1,250 |
| Interest rate (annual) | 39% | 40.80% | 37.80% |
A Credit Card Is A Loan
Using a Credit Card is like getting a loan. It isn’t free money. Every time you make a Credit Card transaction, you are borrowing money until you pay it back later—either during that month or over a period of months.
If you choose to pay the money back over time, the Credit Card Company adds interest to your account that you must pay along with the purchase amount.
If you have been paying the minimum amount due, then the interest rate will be charged (including on new purchases, if any) using the method of average daily reducing balance.
This means, if Nilesh does not repay his Credit card dues for one year (without making any fresh purchases on his card), then he will have to repay the following amount on his Credit Cards:
| Card A | Card B | Card C | |
| Balance Outstanding (in Rs.) | 40,000 | 35,000 | 25,000 |
| Minimum amount due (5% of balance outstanding) | 2,000 | 1,750 | 1,250 |
| Interest rate (annual) | 39% | 40.80% | 37.80% |
| Interest after 1 year (in Rs.) | 15,500 | 14,280 | 9,450 |
| Total dues after 1 year (in Rs.) | 55,500 | 49,280 | 34,450 |
Nilesh’s total balance outstanding as on date =Rs. 1,00,000.
His Credit Card balance outstanding after 1 year =Rs. 1,39,230.
This means he has to repay at least Rs. 1,39,230 to his Credit Card providers after one year.
In order to manage his debt wisely, Nilesh can consider the following options:
| 1 | Convert his existing Credit Card dues into easy EMIs |
| 2 | Go in for debt consolidation through a balance transfer |
| 3 | Go in for debt consolidation through a Personal Loan and repay the amount in EMIs |
| 4 | Negotiate with his Credit Card providers for a lower rate of interest |
Now let us examine these choices in detail:
Option 1: Convert existing Credit Card dues into easy EMIs
Banks might charge 18% to 24% per annum for converting Credit Card dues into easy EMIs. Opting for this option is better than carrying heavy debt with enormous interest (close to 40% per annum) on your Credit Card.
Option 2: Debt consolidation through a balance transfer
Balance Transfer means switching your Credit Card outstanding balance or dues to a new Credit Card. In other words, you can apply for a new Credit Card, which offers a balance transfer option. In this case, your new card company will pay all your previous dues to the old Credit Card Company.
People opt for a balance transfer when the Credit Card comes with a lower rate of interest on the outstanding balance as well as other benefits like an interest-free period, fixed interest rate for first 3 months or more reward points, depending on their internal guidelines.
However, you need to be careful with this scheme as there are several hidden charges to it. You can read the article on “How to use a balance transfer to cut down existing credit card debt” to know more about this option.
Generally, this option works best for those who plan to repay their debt within a few months (preferably within 3 months) and for those who do not utilise greater than 75% of their credit limit.
Before switching, always make sure you read and understand the terms and conditions of a balance transfer as well as the finance charges applicable on the new card.
Option 3: Debt Consolidation through Personal Loan:
You can choose to avail a Personal Loan to consolidate all your Credit Card dues under one umbrella. Whenever your Personal Loan gets disbursed, make sure you pay all your Credit Card dues with that amount. Start by paying the one with the highest rate of interest.
These are the pros and cons of availing a Personal Loan for the purpose of debt consolidation:
Advantages:
| (i) | All your debt will get consolidated under a single umbrella. |
| (ii) | It is easy to keep track of one credit line, rather than tracking several different Credit Cards and their payment due dates. |
| (iii) | Personal Loans have a defined tenure and lower rate of interest, it will make you more disciplined with debt payment and even help you save money in the long run. |
Disadvantages:
| (i) | If you miss your Personal Loan EMIs or default on loan repayment, then it can negatively affect your Credit Score. |
| (ii) | Getting a personal loan for a longer tenure (say 60 months) can reduce your EMI burden today, but in the long run, you might end up paying a higher amount to your loan provider. The longer the tenure, the more money you pay towards interest. |
| (iii) | Personal Loans are unsecured loans and hence carry a higher rate of interest than secured loans like loans against property, loans against gold etc. |
To get the maximum benefit from a Personal Loan, aim to pay higher EMIs for a shorter tenure without defaulting. But, before you do that, analyse your financial situation and commitments before you select this option.
Option 4: Negotiate with your Credit Card Company for a lower rate of interest
If you are unable to repay your Credit Card dues in full, then discuss the situation with your Credit Card provider before moving on to any other option. If you have genuine reasons for missing out on payments, your bank might consider your request to lower the rate of interest.
By working out a solution with your bank, you’ll save yourself from truckloads of paperwork. But, you will still need to manage multiple Credit Cards and the new rate offered can still be more expensive than that of a Personal Loan.
The above-mentioned options can be good or bad, depending on your financial situation. You need to analyse all options available and pick the one that works best for you. If taking out a Personal Loan seems to be the best option out there, then we have a host of them for you to choose from.