Credit Card Debt: How to Get Out of It

Credit cards can be a great addition to your wallet but only if used wisely. Reckless use of your credit can result in a debt spiral that can ruin your budget and eat into all your future income. However, credit card debt is not a life sentence. There are multiple ways how you can get rid of the debt pile and start afresh. If you are already in credit card debt, this article will help you understand various debt reduction plans and some strategies to stay out of debt.

Here are the five most effective ways to get out of credit card debt:

Personal Loans

Credit cards charge a huge interest rate, on average 40% p.a. whereas personal loans interest rates vary from 11% to 18%. You can take advantage of a comparatively lower rate of interest and save on the overall interest payment by taking a personal loan to consolidate multiple credit card debts. Moreover, you can streamline your finances better when too many credit card debts are paid off using the personal loan as there would be only one EMI to pay in place of multiple credit card dues.

Let us understand this with the help of an example.

Suppose a person has a credit card debt of Rs 1.00 Lakh. If they plan on carrying the debt on credit card then they will incur an annual charge of 40%. Meaning if they take a year to pay off the debt then they will have to pay Rs 1.40 Lakh. However, if they take out a personal loan instead of carrying the debt then they will incur a compound interest of 10.99%. This means they will have to pay only Rs 1,06,052 through an EMI of just ₹ 8,838.

Clearly taking out a personal loan is much better than carrying the debt on credit card.

Balance Transfer

Under this method, you can transfer your outstanding amount to a different credit card that charges a lower rate of interest. Sometimes, banks offer teaser rates on balance transfer wherein you would have to pay minimal interest or zero interest for a particular period, say 6 months or 1 year. However, you should not get the card only for this preliminary rate. Read about the fees and charges that the card would entail after the offer period ends. Do your research for a balance transfer credit card and try to find out one that does not only offer better deals on balance transfer but also gives extra benefits that suit your preferences.

Additional Read: Credit Card Balance Transfer: Should you go for it?

Seeking Help from Friends and Families

If you want to come out of debt without taking out a loan then seeking help from friends or family is a good choice. Undoubtedly, you should use this strategy in only the direst of circumstances. For instance, if the primary earner in the family dies or you suffered heavy losses in a calamity, and so on.

One Time Settlement

One time settlement is offered by credit card providers when they realize that you cannot even make the minimum payment. Unlike other debt recovery measures, this is offered as a last resort wherein the bank offers you a chance to get rid of the debt by reducing the amount to a much lower number but not below the principal amount. Still, you should not take this step unless you are in a crisis as this will destroy your credit score. Furthermore, debt settlement will also show up in your credit report. All this will really hamper your chances to avail a loan for the next 7 – 10 years.

Contacting your Credit Card Provider

You can call up your credit card provider and ask for an extended grace period or hold off punitive charges. Some credit card companies also give concession to its customers if a crisis falls on them. For example, American Express relinquishes an outstanding amount of Rs 50,000 if the primary cardholder dies. The credit card provider can only help you if you talk to them and let them understand your situation.

Things to Keep in Mind

When you are already in debt, it may feel like a never-ending situation. Additional interest can further discourage you to plan recourse. But it is extremely important to clear credit card debt as soon as possible before the situation worsens. Here are a few things that you need to keep in mind.

Do recognize and change bad spending patterns

First, admit that you have landed in serious debt. Second, review your past spending patterns. Are you overspending? Perhaps you are spending money on things you don’t even need. Truly, you must realize the harmful effects of impulse buying and realize how overspending hurts you in the long run. This money could be invested in policies or saved to be used on a later date or in case of an emergency.

Determine how to repay the debt

If you have multiple debts across various credit cards then you need a plan on how much to pay and on which ones. The most efficient and judicious method is to close off the lowest debt first and then continue upwards.

Make a budget

Most people fall in debt because they do not plan out their monthly expenses relative to their salary. Therefore, budgets which take into account all the monthly expenses are required. A good budget will help you come out of debt and stay out as well. An efficient monthly budget for reference is mentioned below:

Start by differentiating your monthly expenses under needs, wants, and savings.

1. Under needs, file the bare necessities of your life such as minimum credit card payments, groceries, utilities, health insurance premiums, and so on.
2. Under Wants, list shopping, dine outs, travelling expenses and the like.
3. Finally, under Savings, enter the amount that you spend over the minimum payments of your credit card bills, the amount you save in your retirement account, and any other savings.

Now, allot 50% of your salary on Needs category, 30% to Wants, and 20% to savings. if you can save 20% of your salary then you will be out of debt in no time at all.

Don’t add to your debts

You have accepted that you are in serious debt which if not closed can cause severe problems in your life. Obviously, the best course of action is to not add any other debt. Don’t take out any additional loans. Wait till you have closed off current debt before taking on any major financial risk.

Become disciplined

A budget or repayment plan is only good as the user who implements it. If you are prone to shopping sprees, or impulsive buying then no budget or repayment method can help you. Indeed, you will have to find ways to cut expenses. Discipline yourself, identify the areas where you are spending more than necessary and cut back.

Getting Out of Debt and Staying Out of It

You have landed in debt which has become a source of great stress. Getting out of it can seem tough but it is not impossible. It is important to go over how you fell in debt and trace all the bad financial decisions. Above all, you should keep in mind the lessons learnt while struggling with debt. This will ensure you do not repeat the same mistakes and fall into debt again. The basic rule to stay out of debt is to pay your credit card dues in full and on time.