Managing Credit Card bills - Mission Impossible?

30 Sep 2020 7 min read
Credit Card: How to Avoid Credit Card Debt Trap? -Afinoz

No doubt, credit cards are essential tools. 

You can purchase anything from anywhere without having cash in your hand that too in a quick time.

They are convenient to use; hence, most businesses accept them, including online and offline. And the best part is, you don’t have to stop by the ATM for cash withdrawal every time.

Not just do they offer you more purchasing options over the phone, internet, or in person, but they also provide an opportunity to earn more rewards that can be redeemed later. These reward points also encourage you to shop more.

All in all, we can’t live without them. 

This is the reason that credit card users in India are rising. The Indian ecosystem has recently touched the mark of 48.9 million credit cards. Not just the number of credit cards has increased but the number of transactions and the total spending is also surging.\ 

credit card user in india

Data Source: Reserve Bank of India

The RBI data shows that despite the growing number of digital payment wallets, credit card users have grown up to 27% alone in last year. This shows that people love credit cards because they enhance purchasing power by offering you a credit limit.

Actually, this creates an illusion that you have more money than you really do and allows you to spend from that limit you don’t have.

And, this is where it all starts…

This illusion encourages many people to overspend and, as a result, they end up in trouble. 

Generally, new consumers are prone to that risk because they don’t know how the interest rate is actually calculated on the credit cards and gets into unmanageable debt.

credit card e statement

An Excerpt of The Credit Card Statement

However, you stop the debt from growing by paying off your balances each month but new credit card users make minimum payments and keep making purchases, and their debt keeps on growing. 

In fact, the outstanding balance gets charged about 3% per month and that turns 36% on the annualized basis. However, the effective interest rate could go as high as 50% depending upon one’s repayment pattern.

And the worst part is that they will also charge you a fee for making late payments. This fee adds up quickly to your outstanding balance. In other words, your fees are then charged with interest. 

Assume, you make a purchase of Rs. 50,000 via credit card and you have previous balance. First, in this case, the interest-free grace period will not apply and the bank will apply a Daily Rate of Interest to your credit card balance. The daily rate is calculated by dividing the annual rate (APR) by 365.

Let us understand the calculation of the Daily interest rate by the following graph.

calculation of the Daily interest rate

Rs 50,000 Spends, 40% APR, Nil Payments

The graph shows that debt keeps on growing and compels the borrower to pay a whopping interest rate of over 56% in just one year.

You won’t realize that it’s becoming harder to pay off monthly balance and the situation could get even worse if you’re holding multiple credit cards.

You get trapped in unmanageable debt, and several troubles follow you.

  • Your debts get mounting, which leads to late payments which further add to the balances.
  • Your credit score drops because the credit card repayment pattern also gets recorded in the credit report.
  • Your ability to purchase products and services gets reduced, hence makes you ineligible to access any form of credit when you need it the most.
  • Your professional life also gets affected because you seem as a financially irresponsible person.

But what are the options that you can exercise now?

Or still, there is a way to get rid of heavy debt?

How to get rid of?

If you’re serious about paying off your credit card dues or you want to overcome from the debt trap, then you can think of debt consolidation loan.

When you find yourself in such debt traps, paying them off with a personal loan can be a good idea. Not just do they help to pay off your credit card debt in a single shot, but they also offer some incredible advantages.

  • Merging A Credit Card Debt with A Personal Loan May Boost Your Credit Score: Personal loans are instalments loans and its credit utilization ratio doesn’t affect your credit score like credit cards do. So, if you are paying off your credit card debt with an instalment loan, it can boost your credit score significantly.
  • It Can Reduce the Burden: As you are finding it difficult to pay off credit cards outstanding balance in one shot, you can reduce your burden by paying it with a personal loan by planning a repayment in EMIs.
  • Paying Off Your Credit Card Debt with A Lower Interest Personal Loan Can Help You Save Money: Usually, personal loans are offered at a lower interest rate than credit cards. If you qualify for a cheaper personal loan, then you will pay less money, which will cause savings.
Conclusion

We don’t recommend that you shouldn’t use credit cards at all, but you must be aware about the fact that they can push you in a debt trap easily if you don’t learn to use them. In fact, you should pay off your liabilities via personal loan as early as possible before you get trapped, and then use your credit cards in a smarter way.

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