- HOW IT WORKS?
- Credit Score & Report
- Credit Bureaus
Let us first understand what a Credit Card is- While, The very definition of Credit card says it lets you borrow money from your bank to make any purchase. Be it a restaurant bill or a trip to distant land it works as an instant money and gives you a grace period of about 30 days to repay. You can also refund a percentage of the amount, if you do not have sufficient funds, the bank then charges interest on the money borrowed. So, in other words, you are taking a loan to pay off a loan.
The advantages of using a Credit card are it lets you make a purchase that you might not normally be able to make and pay it off even as EMI. It is easier to carry the card instead of the cash, and it gives you reward points which can be used later.
The primary disadvantage being you can easily get yourself in trouble if you are not careful about the spending. Remember the movie “Confessions of a Shopaholic,” you get yourself into soup for spending on expensive stuff and then not being able to repay it.
There are several ways to pay the Credit Card debt
- Paying just the minimum amount – this is the most expensive way to get there. For instance, you have a debt of INR 50000, and your interest rate is 15%, the minimum payment is calculated by adding interest at 1% to the balance.
- Withdrawing money from your retirement account – Besides pillaging the future financial security, you also pay taxes on the retirement fund if you withdraw. You may also incur a penalty if the funds are withdrawn too early. It is also advisable to find out from the bank about the rates and charges before using this fund to pay credit card debt.
- Robbing from the emergency savings – Emergency funds are for an emergency. It can be a medical emergency, a natural disaster or a time when you might be jobless doe a while. Draining this fund to pay off credit card debt exposes one to a strike. We suggest that if you have to use this resource, do not replenish the entire fund. Use only a part of it, with any other available cash to pay the credit card debt.
- Skipping one of the mortgage payments – Skipping the mortgage payment to pay the credit card debt is also a huge risk you get yourself into, as it leaves you exposed to foreclosure. This strategy is popular in the west as there was a considerable drop in home prices.
- Taking a Personal Loan – The blog explains this part of payment in detail
If you are the one who is carrying a credit card debt, you might want to rethink how to repay it. The soaring high-interest rates might not be exquisite in your pocket. Paying the debt off with the help of a personal loan might have its pros and cons.
A lot of factors should be considered before availing a personal loan, one because it is a loan and a financial burden. Let’s consider a range of possibilities…
Scenario: My friend Raj owes INR 90000 on three different Credit cards, and the bank is advertising about personal loans. Raj guessed that the rates would be much lower than the Credit cards and he hoped to save at least 10%.
- Let us understand this in detail: So, in a scenario like this one, it is not only about the math, there are different ways to look at this. Let us first see what happens if Raj decides to keep the credit card debt. He can visit the bank and ask them if they can lower the rate of interest. Failure to get a lower rate could mean that it can get him into debt trouble.
- Second solution: It is also important that Raj discusses this with the bank, if the rates are reasonable he might want to go for the personal loan. The consequences- failure to pay the same means he might have to pay it with collateral. Collateral can be a car, a fixed deposit or a savings account if he defaults. We would advise him to take up the personal loan only if he is sure to make the payments on time.
- Thirdly, if Raj pays the personal loan without any difficulty, it is important not to get used to this habit. He should pay the entire balance each month.
It is important to remember that on any borrowed money Raj is paying interest. The interest otherwise could have been used for another purpose.
Taking a personal loan never pays off the Credit Card debt, in other words, it is only a way to restructure the financials of that debt. It is a way to get a lower interest rate and a lower monthly payment on a long term. A personal loan is also for a longer duration generally 2-5 years, so the lengthening the term of the loan isn’t the solution to restructure the debt. We explained Raj that personal loan is another unsecured debt. The longer the term, the lower the rate, the personal loan will increase the monthly payment even if the interest rate is lower.
All in all, though using the personal loan for a credit card debt is not suggested, it can be done if the interest rate is considerably low. It also becomes a problem when people depend on Credit Cards to pay even for the basic requirements. While it is an aid for emergency and earns you points, one should not be too dependent and liberal with payments using credit cards. An unsecured personal loan is what is recommended in such situations. The rate should be reasonable and the monthly payments minimum. If you have self- discipline to use the personal loan effectively then we recommend it to finish your debt sooner. On the contrary, if you are the one who changes the behaviour then the personal loan for credit card debt may not be the option for you.