FINANCIAL RADIANCE
FINANCIAL RADIANCE
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I have covered previously on the topic of credit cards. I provided 17 tips to manage credit cards effectively. I have also written about debt traps in the past and also about how can we not live a life paycheck to paycheck. The common theme across all these blogs is managing money effectively. If we do not manage money well, then soon it will start managing us, and that is not good. This blog is about smart ways of paying off the credit card bills effectively.
The number of card transactions has been increasing in India exponentially, more so after the digital India focus. There can be two types of card transactions: debit cards and credit cards. Debit cards transactions are those wherein you can make purchases only if there is money in the bank account and it will get debited immediately after the transaction. Credit card transactions are those wherein the bank gives you a credit which is interest-free for the first few days and then if you do not make the payment in full by the end of the grace period, the bank will start charging an interest rate, which could be as high as 3% to 4% per month. Even if there is one rupee outstanding against your dues, you would stop receiving interest-free credit. That is when the bank starts making money out of you and the free credit card which could have been provided is a bait for you to fall into this debt trap. Ever wondered how the credit limit continues to increase for those who are prompt in making the payments on time and do not default on their dues? Whereas it could be very difficult for those who do not have a good credit history to get loans or credit cards?
There could be a situation wherein there could be outstanding dues against your credit card bill. Here are some of the smart ways in which you can make your payment. It is important not to neglect credit bills and keep making the payments on time, else it could have a serious dent in your credit history.
Do remember that credit card interest is likely to be much higher than most of the investments you may have done like a fixed deposit, mutual funds, or bonds. It may so happen that you can easily pay off the entire outstanding by redeeming your investments or breaking your fixed deposit. Do so and get this outstanding back to zero. If you think that you end up doing impulsive purchases and are not able to control your urge and do binge shopping, then simply cut the credit card into pieces and switch to debit cards. If that is also an issue and when you go out for shopping, then prepare a shopping list planned before you go to the market and take only cash with you. You would never go wrong!
We all know that there is a minimum amount of money that needs to be paid for credit card bills (generally 5% of the entire outstanding amount). While it can be very tempting just to pay the minimum amount, remember the goal is to fully pay off the entire outstanding. So, prepare a schedule based on your cash flows and go ahead and make payment much more than the minimum amount. Remember to add the interest to the future months too when you do the calculations. The goal should be to clear off the entire loan within six months.
Talk to your close friends, family members, and relatives. They may be more than willing to provide you a loan that you can then use to clear off the credit card outstanding. You may also want to offer nominal interest to them, though there could be a possibility wherein they could refuse. But, do remember their generosity, first repay their loan at the earliest and also return their help in the future in whatever way possible, having the gratitude of accepting their help during your difficult days.
Taking a loan from friends, family, and relatives is the best option, but sometimes it does not work out and there could be a danger of relationships going sour. In this case, it is always a great idea to back out and take a commercial loan like a personal loan from a bank. While interest rate, in thatcase, would be higher which could vary from 10% to up to 20% p.a. So, effectively what you do in such a case is shift your loan, from it being a credit card loan to a personal loan, but the debt remains.
You may have seen this option even when you do regular purchases on credit cards. For any shopping above a threshold amount, the bank may give you an option to convert it into Equated Monthly Installments (EMI) payable across multiple tenures, generally up to 24 months. Interest rates could generally vary between 12% to 18%. Remember what I mentioned earlier. Banks would entice you with various options so that you get into the habit of not paying the amount in full, but continue to pay the bills with interest, so that they could make money. But, if you do get into a situation with limited options for making the payment, then you could ask the bank to cover the entire amount as an EMI.
I have seen so many people using this option, proudly showing to others how they “beat the system”. What happens, in this case, is that most banks provide a Balance Transfer facility wherein they take over the balance of your existing credit card company into their books. So, for low or no interest for a limited period, your stress of making the payment is now transferred to the new bank, and then after the grace period you need to make this payment to them. What’s in for the bank? They get a new prospective client who is struggling with making full payments to the bank (so a customer from whom the bank can eventually make money by charging hefty interest in the future). But do check if the bank is charging you any processing fee for this facility, as then this could become expensive. By doing this, your problem gets deferred temporarily, and then it is time for making this payment to the new bank. That’s when I see people scouting for another bank who would be willing to take this loan. They are racing against time hoping that they would have a solution to their financial problems soon. But doing balance transfers like these can severely impact the credit score, so we must be extremely careful with the same not going overboard.
However, note that this is a temporary solution for the next 2-3 months and by that time you should look for a final solution.
If you have a lot of credit cards and there are various outstanding against each of them, then simply put them in descending order of interest rates and start clearing off those which have the highest interest rates. You must take care to ensure that you pay at least the minimum amount due against each of these credit cards.
Sometimes, just talking to your credit card company can help. More so, if you have been regular in making payments but due to specific reasons like cash crunch or a job loss are finding it difficult to pay. No harm trying as banks may be willing to restructure your debt.
As discussed earlier, the bank provides a credit-free period, and then there is a grace period for making the payment. Bank would not charge any interest rate during this time, provide the previous billing cycle did not have any outstanding amount. It is good to know your credit card cycle so that you can time your big-ticket purchases at the beginning of this cycle and then you can get the entire interest-free credit of 45 to 55 days.
Opting for an automatic payment facility is the best option so that you do not fall into this trap at all. If you can link the due date for your credit card with the salary credit day for your company, even better! Just pay the entire amount due on your credit card automatically as soon as the salary is credited. You then don’t need to worry about the missing deadlines and the late payment fees and the high-interest rate charges.
The best of course is to use the credit card responsively and wisely, else simply switch to a debit card. It is also wise not to have a very high limit on the credit card which would check irresponsible behaviour.
The options which I have mentioned here are very generic ones and most of them are no-brainers and are just common-sense solutions. I know just like the credit card issuers, even the users are very innovative and they could have much more advances, out-of-the-box solutions. But the fact remains is that the longer we are living in credit, the longer we are letting the power of compounding vest with the Banks and the finance companies. Whereas what we should strive to do is to live within our means and start investing early to truly live with the Principle which Einstein had once mentioned.
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