Credit card debt: 4 options to pull out of it

Credit cards are an excellent way of making payments. Apart from providing instant access to credit, they help reduce your cost of transaction through attractive reward points, cashback and discounts.

However, these very same features lure many to spend beyond their means. With credit card interest rate ranging between 18–48 per cent p.a., the outstanding balance keep piling up, forcing many to seek debt settlement with the card issuers.

We don’t realize that debt settlement inflicts more harm than good by ruining our credit score and subsequently restrict loan eligibility for a considerable period time. 

If you too are entangled in a credit card debt trap, these four debt management options should help you pull out of it.

Credit card balance transfer:

You could consider transferring your existing credit card debt to another credit card at a lower interest rate. It can either be a fresh credit card or one of your existing credit cards.

The transferee card issuer would extend promotional interest period during which a lower (or even 0 per cent interest rate) will be charged on the balance transferred for 3 to 6 months. This not only slows down the accrual of interest component, it would also provide a window period to save or arrange funds for repayment.

Keep in mind that the transferred balance will attract the usual interest rate after the end of the promotional period. Many card issuers also allow the repayment of the transferred debt through EMIs.

Fresh loan at lower interest rates:

The interest rates offered on personal loans, gold loans, loan against fixed deposits, etc. is much lower than the rates charged by credit cards. While interest rates on credit cards usually range between 18–48 per cent, personal loans come at much lower interest rate, ranging anywhere between 11–24 per cent.

In case, you fail to avail a personal loan due to low credit score or insufficient income, you can opt for secured loans like gold loan and loan against securities.

Conversion of outstanding dues into EMIs:

Some card issuers allow you to convert your entire outstanding card balance into equated monthly installments (EMIs) against the payment of a small processing fee.  The tenure of such EMIs is usually between 3 to 12 months and the rate of interest can be as low as 1.04 per cent per month. However, non-payment of EMIs by due date would attract standard interest rates on the balance amount.

Liquidation/Redemption of investments:

Opt for this option only if certain investments do not yield high rate of returns. For instance, closing your FDs for repaying your credit card debt would make sense as bank FDs may not pay you an interest rate of more than 6-9 per cent p.a. This is much lower than the interest rate charged on alternative debt consolidation options such as personal loan, gold loan, balance conversion, etc.

However, you must avoid redeeming high-yielding investment options such as equity mutual funds for repaying credit card debt, especially if they are attached to your long term financial goals or the equity market is going through a correction phase.

—By Sahil Arora – VP & Head of Payments Product, Paisabazaar.com

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