Used Your Credit Card More Than You Can Repay? Things You Need To Know

While Credit Cards are extremely beneficial in managing your regular expenses and building a strong credit history, they can also be a sure shot one-way pass to a morbid debt trap when used recklessly. Ideally, you should only spend what you can repay, through your Credit Card, and within that too, your spend should be less than 40% of your credit limit for a positive impact on your credit score.

Splurging more than your limit makes you vulnerable to vicious debt cycle, which pulls down your credit score. Remember, outstanding dues continue to step up at a rapid pace due to high-interest rates levied on credit cards (between 23% and 47% pa). In case you have fallen into this debt trap, here are some possible solutions for you:

Transfer your dues to another card
If you are trapped in a horrendous debt cycle, the balance transfer option or transferring of dues from one credit card to another is a feasible method available. This is cheaper and manageable option available for you to pay off your debts.

The transferee bank allocates you with a period of buffer for the transfer. This buffer time allows you to clear off your debts at a low-interest rate between 0 and 1.7% per month. The buffer time is also known as the promotional period which is valid up to six months.  This not only endows you with a window time limit to save or arrange funds to repay but also makes the accrual of the interest component slower. Note that after the end of the promotional period, the transferred amount attracts the usual interest rate.

Convert outstanding dues to EMIs
If you are unable to make the repayment of the credit card outstanding debt, then breaking your outstanding dues into affordable EMIs is a convenient method of repaying the debt. In comparison to credit card interest rates, the rate of interest charged at the time of EMI conversion is low. Generally, banks levy reducing the interest rate of up to 22% pa, with up to 2.5% processing fees of the loan amount. The allowed time period for converting the outstanding dues into EMIs varies up to 24 months and in some cases, it might go up to 48 months.

This option is better than the option of minimum due payment where banks levy higher interest rate on the outstanding balance on daily basis.

Convert Purchases into EMIs
Credit card companies offer their customers an option to convert big purchases into monthly instalments. Any cardholder with a transaction more than Rs.500 can convert their transaction into EMIs within a span of up to 60 days. While this comes with an interest cost and blocks your limit with the entire purchase amount, payment through EMIs allow you to plan and keep your finances in control.

Opt for a personal loan
Outstanding Credit Card dues attract a huge rate of interest. Moreover, if you hold 2-3 cards with such debts, it might turn out to be a nightmare. In credit cards, the cost of interest adds to the outstanding debt. In this situation, it's advisable for you to go for a personal loan to consolidate all your outstanding credit card debts under one umbrella.

The rate of interest for personal loan ranges between 10.65% and 24% pa while the rate of interest for a credit card is between 23% and 47% pa. Therefore, the credit card debt payment via personal loan assists you to pay your high-interest debt with a lower-interest loan, to be repaid through EMIs.

Naveen Kukreja

Guest Author Naveen Kukreja is CEO and co-founder of Paisabazaar.com. He studied engineering at Delhi College of Engineering and holds a postgraduate diploma from IIM Calcutta