How to avoid credit card debt?

Sumukhi Sathe, 27, got her first credit card a year ago. It was convenient to use and she also got a lot of good deals and offers on apparel, electronics, dining out, movie tickets, and so on. The credit card also came in handy when there was a medical emergency in her family. Using her credit card, she paid the hospital deposit despite not having the funds immediately. 

Enthused with these benefits, Sumukhi applied for additional credit cards and continued to use those as well. But she was not regular in paying her credit card dues. Soon, her credit card outstanding amount, across the multiple cards, had touched Rs. 2.5 lakh. Worried about this ballooning debt, she consulted her uncle, a financial planner. He gave her the following tips on avoiding credit card debt.

Basics

As Sumukhi experienced, credit cards are great for convenience. But every rupee spent on the card is a form of unsecured loan. Cardholders are given the option of paying only the minimum due (typically 5% of the monthly bill), for the amount outstanding on the card beyond the due date. But banks charge an interest rate of 2.5% - 4.00% per month or 30-48% per annum, on the overdue amount. This can soon result in credit dues ballooning to unreasonable levels.

Pay the full amount

The best option for the cardholder is to pay the total amount every month before the due date. There is no interest charge this way, and you can enjoy free credit for a month.

No cash advances

Avoid using the card for taking cash advances. These come at a steep interest rate and often a hefty fee.

[Also Read: Enjoy easy and convenient transactions with credit cards]

Have a budget and adhere to it

The first rule of financially disciplined living is having a budget and adhering to it. If you can't afford that latest gizmo without accessing credit on your card, you probably can't afford it.

Limit the number of cards

The more credit cards you have, the bigger the temptation to live beyond your means. Multiple cards also make it difficult to track spending, due dates and payments. Avoid having more than a couple of cards.

Consolidate debt

Sumukhi’s uncle explained that the only way out for her is to consolidate her debt and pay it off. He advised her to approach her bank for a personal loan for Rs. 2.5 lakh. Taking on a new loan when already weighed down under considerable debt may sound counter-intuitive. But since the interest rate on personal loans is lower than the interest rate charged by credit cards, this is a good option for Sumukhi. She should avail of such a loan and pay her entire credit debt off, as that will save on her interest outgo.

After Sumukhi does that, she should assiduously pay her credit card EMIs (Equated Monthly Instalments) on time and not default on them. Sumukhi’s uncle also warned his niece that she should look at the whole experience as a learning one and not repeat the mistakes that led her to accumulate debt on her credit cards.

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