Archive for the ‘credit cards’ Category

Reduce your credit card debt

Credit cards are very convenient and have become a everyday part of our lives. Often we lose control of our spending as it is too easy to make a minimum payment and roll over the payment to next month and then the next and then the next. Before you know the debt becomes unmanageable.

Pankaj Jain.29. sales executive, is a happy go lucky chap. He works hard and loves to have fun too. By the middle of the month he starts running low on cash. Cash withdrawal from the credit card and payments on the credit card seem like the best option to him. Of late, he noted that he has been barely able to pay off the minimum balance due and the total amount due has been rising dangerously. Though he has reduced his spending now, each month the interest has been mounting and it was swelling the total amount due. Pankaj need some serious debt management

Steps to manage debt

  1. 1.    Change the lifestyle causing debt

In most cases debt mounts up due to excessive spending and lack of checks and balances. Very often these are not even big or asset building expenses. Most often the credit card is whipped out on impulse buys for clothes, accessories or to pay restaurant bills.

  1. 2.    Stop using the credit card

Don’t reduce it – just stop. Put the cards in a sealed envelope in the darkest corner of your cupboard. If you have to pay Rs 5000 for a pair of shoes in cash, it will pinch much more than paying by card. It will also help you curb impulse purchase after all you cannot buy more than the cash you are currently carrying.

  1. 3.    Take a loan

The overdue interest you pay on credit card debt is between 36% – 40% p.a. 10-15% more than what you would pay on an unsecured personal loan and 20-25% more than a secured loan such as a home top up loan or loan against an LIC policy. Look at all your option and make some calculation. Lastly, do not let your ego come in between taking a temporary loan from close family if offered.  Avoid settling with the bank or defaults since will reflect poorly in your credit report and you may be rejected for a loan when you need one.

  1. 4.    Understand where you are overspending

To make change permanent it is essential to understand the problem areas. Take your credit card bills of the last 1 year and try to figure out which are the high spending items there. Is that Rs1800 shirt you purchased a year ago still in use? Would it not be of much better value if you had brought one for Rs500?

  1. 5.    Set up a budget

Budgeting does sound boring but wallowing in debt is far worse. So you need to allocate your spending prudently. Till your debt is fully repaid ALL unnecessary expenses have to curbed include the evening coffee at Starbuck.

  1. 6.    Be prepared

When the debt is repaid one breathes a sigh of relief and then goes back to the same destructive behaviour. It much like going on a strict diet and then binging. Be prepared for the urge for financial binging. Living within your means is not difficult as long as you have made up your mind to do it.

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Managing your credit card debt

Though widely used and immensely convenient, credit card can become your worse enemies if you are careless. One negative aspect of using credit cards instead of cash is that you don’t feel like you’re spending real money. The pleasant feelings you experience when you purchase the item are disconnected from the unpleasant or painful feelings of making the payment when you get the credit card statement.

Studies show that most people are much less likely to buy, or less willing to spend as much, when paying with cash as opposed to credit cards.

Falling in a debt trap

Falling in a debt trap is easy when you using your credit card. The problems start not when you use your credit card but when you do not pay the entire amount on the due date.

The bank will charge you an interest of 2.95% (atleast) on the pending amount.

And, this interest is charged on a monthly basis; per year, it works out to a whopping 35.4%.

If you have spent Rs.1,00,000 this month then the interest you pay works out to Rs.2,950/- if you have not repaid the entire amount that month.

Lets say you realise the folly of your ways and spend only Rs.10,000 the next month on the credit card.

Unfortunately, you are no longer enjoying the benefit of ‘free credit’.

This month your outstanding balance will be Rs.112950 + Rs.3332/- = Rs.116282/-

Earlier, you spent money through your credit card and paid up when the bill came at the end of the month.

From the time you spent the money till the time you paid the bill, you were enjoying free credit; when the bill came, you paid just what you spent.

Now that you owe the bank money, you don’t have the privilege of free credit anymore.

Also any the very convenient cash withdrawals are never interest free.

Now, until you clear your loan, every single payment you make using your card will be added to your loan amount and you will be charged interest on it.

This will go on till every single rupee has been repaid.

How to avoid Credit Card Debt

· Your credit card spending is a loan and make sure that you treat it like wise. Credit card companies agree to loan you money interest free for averagely 35-40 days. You can use this to your advantage as long as you pay off the “loan” by the due date each month.

· If you feel you need to carry plastic for emergencies, then try a debit card. It will ensure that you are spending only the money you actually have. Unlike the west, in India we have a vast support system that ensures that you can easily borrow emergency cash when you need it.

· If you do use credit card do try to make the payments in full. Incase you are unable to meet the entire payment then ensure that you set aside the entire money for it from your next paycheck and curtail the credit card usage till the balance is cleared. Remember that there is whopping 36% p.a. or more interest to be paid not only on the outstanding balance but also on any fresh purchases you make.

· Plan your purchases well. When you go out shopping make a list and stick to it as far as possible. Don’t be swept away by discounts on products you don’t need. Remember, retail stores are designed so that you spend more. Beware of marketing tactic that make you spend more.

· Avoid cash withdrawals and balance transfers from your credit card since they attract interest from day one.