One of the many reasons consumers are apprehensive of owning a credit card is the fear of being caught in a debt spiral. However, credit card debt emerges only out of irresponsible credit behavior. Also, if by any chance you are stuck, strategizing your next financial moves at the right time can easily help you recover out of it.
On this page, we discuss the credit journey of one such card user who strategically navigated through a debt. In her credit age of seven years, Pooja, a 32-year-old marketing manager, landed herself in credit card debt. However, better late than never, she identified the possible causes and impact of her being caught in the debt spiral and started focusing on the breakthrough.
Pooja started using credit cards seven years ago when she was 25. In two years of her juggling multiple credit cards and the mismanagement that followed, she landed in a credit card debt of Rs. 4 Lakh with a lowered credit score of 612.
Possible reasons of debt:
- Frequent overspending beyond her means on leisure and lifestyle categories like shopping and travel.
- Paying only the minimum amount due, not realizing that this is piling up the interest on not only the outstanding amount but also on the new purchase she was making on her credit cards.
She soon strategized responsible credit behavior and came out of credit card debt, rebuilding her credit score and eventually her finances. Here’s the roadmap she followed:
April 2020: Begins with Monthly Savings & Balance Transfer
1. With a monthly income of Rs. 60,000, Pooja built a monthly budget for savings, expenses, and emergency funds, inclusive of a debt repayment amount.
- Essentials: Rs. 20,000
- Leisure & Lifestyle: Rs. 10,000
- Debt Repayment: Rs. 20,000
- Savings: Rs 10,000
2. As per this budget, Pooja aimed at saving Rs. 120,000 (12*10,000) in a year, and based on the monthly capacity to repay the debt, she opted for a credit card balance transfer that would allow debt repayment in EMI.
Outstanding balance: Rs. 4 Lakh
Rate of Interest: 1.7% p.m
Tenure: 24 months
Monthly EMI: Rs. 20,137
One year Late- April 2021: On-time EMI Payment, Partial Prepayment with Savings
3. Pooja paid this monthly EMI for a year, leading her remaining outstanding balance to Rs. 2,14,000.
4. To further close the debt quickly, she used surplus savings of Rs. 1,20,000 to prepay the outstanding amount partially.
Outstanding balance post prepayment (2,14,000−1,20,000) = Rs. 94,000
Now, based on the new amount, she got a lower EMI liability for the remaining tenure (12 months) of Rs. 8,901.
Considering an increase in income from Rs. 60,000 to Rs. 75,000, her revised budget was:
- Essentials: Rs. 20,000
- Leisure & Lifestyle: Rs. 10,000
- Debt Repayment: Rs. 9,000
- Savings: Rs. 31,000
5. Pooja then paid the new EMI (lowered) for a year.
April 2022: Debt-free
Pooja eventually got rid off the debt. Post this period here monthly savings were Rs. 40,000 and total debt stood at 0.
The final outcome:
With the credit card debt repaid in 24 months, Pooja’s credit score improved from 612 to 729. She now owns six credit cards, knows card usage better and maximizes benefits and saves on her day-to-day and leisure expenses.
