We all know people who are obsessed to shopping. Spending money in buying clothes, home furnishing, electronic items and other household goods give them immense pleasure. This problem is boosted up by the advent of the alluring strip of plastic. It gives you the freedom to shop till you drop. However, the problem may start when the bill comes home. And soon you find yourself living on credit, unable to crawl out of the debt hole. This article can act as a helping hand for such people.
Solution to the Problem Refer to the article on Ten Credit Card Precautions You Must Take. Other than taking the prescribed precautions, one should keep in mind the below mentioned points.
Lack of Awareness about High Interest Cost
Credit card is the most expensive debt around. Most of the credit cards charge 3 to 3.5% per month i.e. whopping 36 to 42% per annum. Even private money lenders don’t charge that kind of interest. The reason why most of the people get into the trap is that, they are not aware of such high cost. Though the RBI has stipulated that banks must inform clients of their annualized rate of interest, in most cases, this is mentioned in fine prints. People see the small figure of 3% per month and rarely stop to do the calculation of the interest burden they have to carry.
Pay the Entire Amount due Every Month
First, truly understand that using your credit card doesn’t exempt you from making that payment. Live within your monthly budget. Never bring forward your shopping based on what you think you will be able to pay back. We all need to recognize the words ‘minimum payment due’ for the trap it really is. So remember, if you use a credit card pay up the entire amount due at the end of the month.
Negotiate with your Card Issuer
If you notice that your credit card bills are getting out of hand, speak to your card issuer right away. Explain that while paying the interest may not be possible, you can afford to pay the principal debt amount. Banks (issuer) may show some leniency in some cases in order to retain the customer. Some banks are even willing to outline a debt-repayment programme. They may extend the period of the payment or may agree to accept a reduced interest rate.
Break a FD or Take a Loan
Paying off the credit card debt must become your first goal. For this, even taking a personal loan is worth. Interest on such unsecured loan is as high as 20% per annum, but that’s still lower than what you are paying towards credit card debt. Noting you’ll earn by way of interest on any form of investment will equal what you are paying towards interest on that debt you have run up on your credit card. So it’s worthwhile to break any fixed deposit or withdraw investments to pay off this debt.
Go to Neutral Debt Counseling Session
One such centre, which I came across, is Abhay – an initiative of bank of India, which anyone can avail of irrespective of whom they bank with. Such centers have experts can help work out the best way to pay off debt and structure finances.
Decide on One Credit Card
After you have gone through all these channels, decide on single credit card that you would like to keep. Your choice could be based on
• the credit limit available on that card
• the interest rate
• what type card it is and the offers and reward points you get on such card
• the fact that you have standing bill payment instructions attached to that card
Once you have decided, transfer your debt from other cards to this one. That is possible to arrange when you have a card that still has balance available on it.
Switch to Debit Cards Tossing the credit card away is the safest way of not getting into the debt trap. Opt for debit card instead. That way you are only using money you have in your savings account. You should ideally have enough cash in the bank to take care of expenses for six months.
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