If you are reading this article, then odds are good that you are in a deep credit card debt and looking for a way to get out of it. You are not alone in this quest. According to a recent RBI report, the credit card outstanding amount in India has reached an all-time high and the debt of an average Indian is alarmingly increasing. These facts point to a really precarious situation for those who are in the habit of rolling over their credit card dues.
An average Indian is usually living in a paycheck-to-paycheck situation; a credit card debt piled up alongside this leads to a scary financial condition. Thankfully, it’s never too late to put a leash on your credit card. Here we will talk about a few simple steps you can take to manage a pile of credit card dues without putting a lot at stake.
1- Create a Payment Strategy and Stick to it
The first and foremost rule about managing your finances is that you should have the goals clear in your head. Unless you make a strategy, you keep making haphazard payments in different credit cards only to find them piled up again. Hence, it is extremely important to devise a strategy. There are, basically, two rules-
- Pay off the debts with highest APR first
The reason why you end up with a heap of credit card bills is the interest cost. Missing out on even a single payment is harmful; skipping many bills can lead to a disaster. So you need to look at all your credit cards and arrange them according to the Annual Percentage Rate (APR), keeping the highest on top. The one with highest APR should be your main focus. Make as much payment in this credit card as possible but do not skip other payments. Just make a goal of paying some extra towards that card, say Rs 3,000. Keep paying Rs 3,000 extra until the dues on that card are over. Then, move to the next highest APR card.
- Pay off the credit card with lowest balance first
When it’s about striking a task off the list, start with the card that has the lowest dues. Make a goal of paying extra amount in the card that has the lowest dues. It won’t be long before the dues vanish from that card and you can focus on the next one with a larger outstanding balance. This strategy will help you see the results of your commitment in a short time.
2- Give Debt Consolidation a Chance
Consolidating all you credit cards into one can help a lot in managing scattered dues. After all, a single payment per month is better than 4-5 payments in a month incurring separate interest cost on each. Credit card balance transfer is a pay down strategy that works well in most of the cases. You can transfer other credit card balances to one card that offers lower interest rates. Some credit cards also come with attractive balance transfer plans like an interest-free period. Remember, you have only transferred separate balances into one card; it does not mean that all dues went away. Make a habit of paying more than minimum due on this card to avoid another drop in finances.
Sometimes, banks also offer a debt consolidation loan which is a type of unsecured personal loan. You can opt for it and pay off all your credit card dues and then pay the EMIs of only the personal loan. This might be a good idea as a single line of credit is easily manageable. However, make sure that you pay your EMIs on time otherwise it can affect your credit score. Choose a reasonable tenure and make payments regularly.
3- Freeze Your Cards
It is unbelievably hard to cut down your credit card dues if you keep ringing new balances on them every month. So you need to stop relying on your credit card for purchases. Keep them out of your wallet when you go shopping and cover all your expenses with available cash balances. This will limit impulsive purchases and your credit card will also be safe. Remove your card details from online stores. Shift the recurring payments to your debit cards. The less you use your cards, easier will be your debt management.
A number of people own more than one credit card. It is advisable to limit the usage on each card to keep the debt maintained. Ideally, you should not exhaust your entire credit limit; it is safe to use 60 percent of your sanctioned limit. Also, avoid cash withdrawals from your credit card as it entails a high interest payment apart from the one-time fee.
4- Understand the Impact of Debts on Your Credit Score
Your payment history and outstanding debts are the two main things that impact your credit score. And such credit card dues can lead to a sharp decline in your credit score. A bad score will be detrimental in getting loans in future. Even if some of the lenders agree to lend to you, the interest rates offered will be very high and hardly negotiable. As you make payments to your credit cards, the debts will decrease and the credit score will improve. Hence, it is in your best interest to start making extra payments and free yourself of the dues.
5- Keep a Watch on the Monthly Statements
You are already full with debts up to the brim. In such a situation, a wrong debit on your card or a technical error can add to your miseries. So whenever you receive the statement in your mail, study it properly and understand all components of debit and credit. Keeping a watchful eye can save you from sliding down the debt pit.
So, if you have huge debts piled up on your credit card, you are already walking on a tightrope. It’s time to stop overspending and start strategizing. Begin with making a list of all your credit cards and prioritizing the payments. Spend some time thinking about your spending patterns, reset some of your habits and manage your debts.