This article is authored by Rajiv Raj, Director & Co-Founder of CreditVidya.
For many, Diwali is a time to indulge. The discounts and various schemes - cash back, payment by EMI, buy one-get one free, and so on, ensures that some go overboard. This indulgence could easily land individuals in a debt trap. If you are guilty as charged and are faced with a huge credit card bill, here is how to deal with it.
- Get a grip on the situation.
If you have made big-ticket purchases, list them down along with the cost of funding and the time you have on hand to repay it. This is only for purchases. You may also have accumulated debt due to other expenses – dining out, booking air tickets for travel, shopping for clothes, and so on and so forth.
List down all your debt and how much it costs.
- Kill the credit card debt
The interest rates on your credit card outstanding, if not serviced before due date, range between 36% and 42% per year. Aim to retire this debt first. If you cannot pay-off your credit card outstanding replace it with some cheaper option such as asset-backed loan and personal loan. You could get a personal loan at around around 16%-24% per annum for a 3-year time frame, and prepare a plan to service it.
Alternatively, you can also look at the EMI option of repayment. To understand the pros and cons of an equated monthly installment, read How to deal with credit card debt.
Don’t blindly go for a balance transfer to another card. Banks issuing credit cards are more than eager to offer a balance transfer facility. It sounds like a solution, but is not. It postpones the problem rather than solving it. My advice is to use balance transfer sparingly.
- Cheaper loans are welcome
If you have a home loan, approach your bank for a top-up loan, which costs around 12% per annum. This will ensure that you borrow at the lowest possible cost.
If you have some investments such as traditional life insurance policies, shares, mutual funds units or even fixed deposits, you can consider raising loan against them. The rate of interest is generally lower than other debt. For example, a loan against fixed deposit is available at a rate of interest of one percentage point more than that of available on fixed deposit. If the fixed deposit earns a rate of interest of 9%, the loans against it would be charged at 10%.
Having said that, do note that a loan against a fixed deposit is a temporary solution. It does not work for a large pile of debt. In such situations, it makes sense to sell some of low yielding investments such as fixed deposits and reduce the loan pile.
Getting back to normal
If you have sold some of your investments, do share it with your financial planner and make it a point to replenish them as soon as possible. Don’t put your long-term financial planning off track for too long.
Finally, get realistic about your habits. Diwali is over but Christmas and New Year are round the corner. List down where all your money has been spent and what led you into debt. If possible, sell some of your purchases at a discount if you really find that you have no use for them. Alternatively, if you are expected to give a lot of gifts in the coming months, you could re-gift the items you have bought and are not going to use. That will save your future expenditure.
Going ahead, be selective when it comes to shopping. Stick to a shopping list and try not to get carried away by sales. If you cannot control your spending, use debit and cash cards to help you avoid getting into debt.
Remember, a credit score above 750 indicates an attractive credit profile. And it takes time to build a good score. Don’t ruin it with impulsive spending. Click here to read how to get a good credit score.
