The utility of credit cards is no longer restricted to making payments and accessing quick credit. They also come with attractive offers and benefits on card transactions, which if used smartly, can significantly reduce your transaction costs. However, these very benefits and instant credit access entice those without the financial discipline to spend beyond their means. This leads them to delay or default their bill repayments. If not tended sooner, the outstanding grows rapidly due to steep finance charge and late payment fee. One of the best ways to come out of such a debt trap is to avail a personal loan.
Benefits of availing a personal loan to get rid of the credit card debt trap:
Lower interest rate
The rate of interest charged on unpaid credit card bills are higher than most of the loan options. Also known as finance charges, it can be as high as 49.36 % p.a. Additionally, you will incur late payment charges of up to Rs 1,000 if the minimum amount due also remains unpaid. On the other hand, the interest rate of personal loan range anywhere between 10.50%-24% p.a. basis your credit score, job profile, loan amount and various other eligibility criteria.
Easy to manage repayments
While credit cards enable you to convert your outstanding dues into EMIs, those with outstanding balances on multiple credit cards would imply multiple EMIs and due dates. Opting for a personal loan to repay your multiple credit card bills would allow you to consolidate multiple debts into a single personal loan with a single interest rate, tenure and EMI date.
Restores interest-free period
An interest-free period is the difference between the date of credit card transaction and bill due date of that billing cycle. This period usually ranges anywhere between 18 and 55 days. You do not have to pay any interest on the credit card transactions, provided you pay your entire outstanding bill by the due date. Failure to do so can lead to the withdrawal of this facility on fresh credit card transactions, attracting finance charges right from the date of the transaction till you pay off your unpaid bills. Opting for a personal loan will allow you to pay off your existing dues in entirety, which will restore your interest-free period and continue to make usual credit card transactions without incurring finance charges.
Things to consider while availing a personal loan for paying off credit card debt:
Avoid direct loan applications with multiple lenders:
When you apply for a loan, lenders fetch your credit report from credit bureaus to evaluate your creditworthiness. Such lender-initiated requests are considered as hard enquiries and each of them leads the credit bureaus to reduce your credit score by a few points. Hence, initiating multiple personal loan enquiries within a short time span would lead to a faster reduction of credit score, and thereby, your personal loan eligibility. Instead, visit online financial marketplaces for loan comparison as the credit enquiries initiated by these marketplaces are considered as soft enquiries and do not impact your credit score.
Choose your loan tenure on the basis of your repayment capacity:
A shorter loan tenure results in higher EMI whereas a longer loan tenure leads to smaller EMI but higher interest cost. Hence, opt for a shorter tenure only if you can comfortably repay your EMIs by the due date without sacrificing your contribution towards crucial financial goals. If not, opt for a longer tenure.
Compare with alternative loan options:
Secured loan options, such as top-up home loan, loan against property, gold loan and loan against securities usually charge lower interest rates than personal loans. Some of them also come with longer repayment tenure. Apart from these secured loan options, credit cardholders can also consider credit card balance transfer option to transfer their dues to another card to benefit from the promotional interest rate period. During this period, the balance transferred attracts lower or zero interest rate for a limited period, usually up to six months. Likewise, cardholders also have the option to convert their outstanding dues into EMIs at significantly substantially lower interest rate than the original finance charges.
Hence, visit online financial marketplaces to compare interest rates charged by different lenders on personal loans as well as other alternative loan types. Also, ensure to enquire with existing and other card issuers about EMI conversion and credit balance transfer respectively before taking the final decision.
Returns from your existing fixed-income investments
Fixed income instruments, such as bank FDs and debt funds, generally earn a lower rate of returns than personal loan interest rates. Hence, consider redeeming fixed income investments to pay off your outstanding credit card dues if those investments are not linked to crucial short term financial goals. However, desist from using your contingency funds as any unforeseen financial emergencies might then force you to opt for costlier loan options.