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The following are the ways to avoid Credit card Debt Traps
1. Take stock of the situation
The first and most important step to take is to acknowledge the problem in hand. If you become a defaulter on your repayment on your credit card, it will impact your Cibil score negatively. While making one late payment may not hit you immediately, but if you get into the cycle of late payments it may be difficult for you to get out of it over a longer period of time (ranging over 60-90 days), which will then shave the points off your Cibil score eventually.
2. Balance transfer
This is a facility that banks offer to people who have a large outstanding balance. In this facility you can transfer the outstanding balance from one credit card to another. You could opt for a fixed duration balance transfer (usually a 3-12 month window) within which you can make the repayment at an interest rate that is lower than what you would have paid on your regular credit card. The rate of interest is usually 9-10 per cent (differs from bank to bank). Some banks also offer a “lifetime duration” option to make the repayment, though the interest rate in this case is much higher (in the range of 12-24 per cent, depending upon the bank). In order to get this facility, you will have to pay a processing fee, which will be around 2 per cent of the outstanding amount you wish to transfer. After the bank verifies your details, they will send you the cheque or the demand draft in favour of your existing credit card that you can use to repay the first card.
3. Converting outstanding balance to EMI
If you do not want to go through the hassles of balance transfer from one credit card issuer to another you could consider converting your outstanding balance into monthly instalments. Banks may offer a rate of 1.49 per cent to 1.99 per cent per month to their existing customers, but this too may vary from bank to bank. However, the point to be noted here is that if you miss a payment cycle during the EMI repayment, the bank will revert to the regular interest charges and you will find yourself stuck back in the same situation.
4. Opt for cheaper loans
Of all the debts you service, the rate of interest you pay on your credit card is the highest at 36-42 per cent per annum if it is not serviced on time, so it makes sense to opt for a cheaper loan to repay this high cost debt as soon as you can. You could therefore consider a personal loan for a period of three years if you are in a position to service it. The interest rate you would pay for it would be in the range of 16-24 per cent
5. Negotiate for a lower rate of interest
If you feel that none of the above options are feasible for you could pay a visit to the bank and explain your financial situation to them. If you can convince them about your willingness and intention of repaying, chances are that you can get a low interest rate or a flexible repayment schedule depending upon the bank’s policies. However, do consider the feasibility of the other options discussed above, before you think of doing this.