There are two sides of the coin to credit cards


[By Rajiv Raj]


Introduction

Credit card debt is the most expensive type of debt. Though tremendously convenient, it is very easy to over-use the credit cards, leading to disastrous consequences. Not only is extremely expensive financially, it also brings down your credit score.

Story

Credit cards are no longer a luxury; they are a fact of life. They make our lives convenient and infact there are payments where credit card is essential. However credit cards have an evil side to them. The high credit limits given by banks along with the low minimum balance payable each month can lure you into over spending and postponement of total payments. With the tremendously high interest rates it is all too easy for the outstanding balance to pile up and to spiral into a debt cycle.

Shivam Dongre, 26 year old MBA working with an MNC had recently shifted to Mumbai. He was enjoying his single life tremendously. But with the high rentals and his over-spending habits, Shivam is always running a bit short of cash. The trusty credit cards come in handy here, be it quick cash or paying for dinner out!

Most months, Shivam managed to repay the entire amount of the credit card bill but at one time he paid the minimum balance or just a little more for 3 months continuously. To his shock, at the end of three months he was saddled with a debt which would take him years to pay off.

How the credit card charges pile on

Credit cards have an extremely high rate of interest. If you pay your bills on time and in total, then the interest rates are inapplicable, however if you are making minimum payments or late payments, the interest rates weigh down your credit card bills.

While most credit cards offer you an interest free period, the actual number of days you enjoy will depend on when the purchase is made with respect to the billing cycle. An important point to note this credit free period disappears under the following circumstances:

If you have rolled over your balance payable and still have not paid it in full, you do not enjoy any credit free period. The interest on any purchase you make on your card will start piling up the day of the purchase.

The same holds if you have withdrawn any cash against your credit card, you lose any interest free period advantage. Interest is charged against cash withdrawals from the very day the withdrawal is made.  You have to pay transaction charges on cash withdrawal on credit card, which are as high as 2.5 percent of that cash withdrawal and then you have to pay interest on that. 

Do not let debt defeat you

Here are some practical tips to avoid getting into credit card debt or if you are already trapped in to get out of it quickly.

Keep track of your daily expenses. Keep a diary for a period of a month to understand your spending pattern. Especially note down the spending you do on credit cards.

If you are having outstanding payable on more than one credit card, which you are unable to repay in full, then arrange the credit cards in order of the highest interest rate to be paid off first. Ensure that you are paying the minimum balance plus 10% on each of the other cards.

Look at other options to lower the interest rate you are paying. The options may be to balance transfer to another bank, paying off by borrowing on a personal loan or asking your present bank to restructure your outstanding credit card debt repayable by EMIs at a more beneficial rate.

Above all, curb your current expenses so that you have more spare cash to repay the debt as soon as possible.

The author is Co-Founder & Director, CreditVidya 


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