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Festive spending: Smart credit card moves to avoid debt traps

Moneycontrol logo Moneycontrol 20-10-2020 Venkatasubramanian K
a drawing of a person: Festive spending: Smart credit card moves to avoid debt traps © M Saraswathy Festive spending: Smart credit card moves to avoid debt traps

The auspiciousness of making big-ticket spends during the festive season leads many to spend beyond their immediate repayment capacities. Those having credit cards usually consider it as the first option to finance their festive spends. Increased spending raises the risk of falling into a credit card debt trap, especially for those lacking financial discipline or product awareness.

 Incorporating these smart moves can help avoid falling into a credit card debt trap this festive season.

Figure out your repayment capacity

Non-payment of credit card dues by the due date can cost hefty finance charges of 30-49 per cent annually. Any failure in repaying the minimum amount due (MAD) on your credit card bill would additionally attract late payment charges of up to Rs 1,300 per billing cycle, depending on the bill amount and the issuer. Additionally, it can also adversely impact your credit score and, thereby, reduce your future loan and credit card eligibility. Not clearing your bill amount also results in the revocation of the interest-free period on fresh credit card transactions until the full outstanding bill is repaid. Hence, you must always factor in your repayment capacity within the next due date before making credit card spends.

Opt for EMI conversion option if unable to clear dues

Those who are unable to clear their bill amount on time should convert their entire outstanding dues or a part of it into EMIs. Cardholders can also consider converting big-ticket spends beyond a threshold limit set by the card issuers into EMIs. While the interest rate of such EMI conversions can vary widely on the basis of the card issuer, the tenure and credit profile of the card holder, it would still be considerably lower than the finance charges levied on unpaid credit card dues. Thus, converting outstanding balances into EMIs can lead to a sizable reduction in your interest cost. Also, as the repayment tenure for such EMIs can range anywhere between 3-60 months, you should opt for EMI tenures according to your repayment capacity. Doing so will allow you to comfortably repay in smaller tranches without impacting your liquidity and credit score.

Look for the no-cost EMI option for big-ticket purchases

Various credit card issuers tie up with the merchants, both online and offline, for offering no-cost EMIs on select products and services. The interest costs incurred under this option are borne by the merchants, with cardholders just repaying the purchase cost in form of EMIs. The cardholder would just have to bear the GST levied on the interest component. The savings made on interest make this option ideal for those lacking immediate repayment capacity or liquidity to make big-ticket festive spends.

Some card issuers also offer additional discounts to their credit cardholders on purchases made through no-cost EMIs depending on their tie-ups with the manufacturer/merchant. The availability of this additional discount can further reduce the purchase cost for the borrower. Hence, those having multiple credit cards should compare various no-cost EMI offers available on their credit cards before making the purchase decision.

Avoid withdrawing cash from credit card

The interest free period available on your credit card transaction is not applicable in case of cash withdrawals made through your credit card at ATMs. Every time you withdraw cash through your credit card, the card issuer will levy finance charges of 30-49 per cent annually from the day the cash is withdrawn until the day you make the final repayment. Additionally, you will also incur a cash advance fee of up to 3.5 per cent of the amount withdrawn. These two charges together can adversely impact your financial health, especially when such cash withdrawals are conducted on a regular basis.

Hence, withdrawing cash via credit cards should always be avoided. And if it really becomes unavoidable, ensure you repay the entire withdrawn amount at the earliest to avoid piling up of finance charges and cash advance fees.

Redeem accumulated reward points

Most credit card reward points come with expiry dates. As most card issuers allow the accumulated reward points to be used for purchasing merchandise or services, try to use your accumulated reward points, especially if they are nearing their expiries, for purchasing merchandise or gifting people during this festive season. Doing so would help you to reduce your financial burden in this festive season.

Focus on repaying credit card debt of the moratorium period

A sizeable section of consumers witnessed income and liquidity disruptions due to the COVID-19-related restrictions, forcing them to opt for moratorium on their credit cards dues. As the credit card dues continued to incur high finance charges during the moratorium, most of those that availed the moratorium would have a bigger credit card debt by now. Hence, the prime objective of such cardholders should be to repay their outstanding due as much as possible and reduce the compounding of their debt. Those who cannot repay their entire unpaid dues should contact their card issuers to either convert the dues into EMIs or avail the restructuring facility offered to them.  As and when their pre-COVID income and cash flows are restored, they should try and prepay those restructured facilities as per their liquidity and priorities to reduce their overall interest cost.

(The writer is CEO & Co-founder, Paisabazaar.com)

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