Credit Card Debt: How to Manage Your Payments and Avoid High-interest Rates

Credit cards can be a valuable asset during financial emergencies or when making significant purchases if used prudently. With their versatility, credit cards are a solution provider for a variety of payment needs. However, the plethora of credit card options can lead individuals to hold more cards than necessary and use them carelessly, resulting in a cycle of debt that becomes increasingly difficult to escape.

Furthermore, credit card debt can be a heavy burden due to its high charges and penalties associated with it. If you do not pay your dues on time, you will continue incurring heavy charges on both your unpaid balance and any new transactions made with the card until the outstanding amount, along with the charges and penalties, is paid off in full. Additionally, credit card debt can negatively impact your credit score, which may affect your ability to qualify for future loans.

Hence, taking action before the situation worsens is crucial, especially if your monthly credit card bills are adding up and becoming difficult to pay in full. This should be viewed as a warning sign to prioritise financial discipline and make necessary adjustments.

1. Know Your Credit Card:

Understand that credit cards are created to cater to a diverse range of consumers, each with their unique incomes, requirements, and objectives. Your credit card comprises various components, and it is essential to review the fine print meticulously, including the interest rate, monthly repayment period, and usage regulations when travelling overseas.

In addition, cardholders tend to overlook certain fees and charges, such as annual fees, late payment fees, interest rates, foreign exchange charges, cash withdrawal charges, and more. Understanding the various fees and charges associated with your credit card usage and transactions is crucial to avoid overwhelming debt, just as much as being aware of the card's advantages. Investing time in research and reading the fine print is worthwhile in order to avoid unpleasant surprises in the future.

Cardholders generally trust the words of a credit card company representative or salesperson. However, such representatives may not always disclose all hidden terms, conditions, or charges in order to make a sale. Moreover, these charges and terms are often displayed in a small font on the credit card brochure and company website. Instances have been reported where cardholders were promised a credit card without any annual fee, but the credit card provider started charging an annual fee after a year or two. Upon complaining to the company's customer service, the cardholders were informed that there was a minimum spending requirement to avail of the annual fee waiver.

2. Make Timely Repayments:

Credit card users who lack financial discipline often overspend, while some forget the due date, especially if they have multiple cards. Regardless of the reason, failing to pay the entire credit card balance by the due date will result in high interest charges, as credit card providers typically have high interest rates, leading to increased outstanding balances.

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Some individuals pay only the minimum amount due, falling into the trap of being charged interest on the unpaid balance until it is fully paid. Thus, you need to make sure you pay credit card bills in full on or before the due date. If you have already incurred debt, it is best to pay as much as possible to minimise interest charges.

Furthermore, before making significant purchases, you should have a proper repayment plan and be consistent in clearing the total balance on time. Setting up an auto-pay system to pay credit card bills automatically on the due date via your registered bank account is also a good option to avoid delays in repayments.

3. Convert Your Dues into Credit Card EMIs or Opt for a Loan:

If you have already incurred a huge debt, which is challenging to repay, you can convert your big purchases or monthly bills into affordable EMIs. For instance, if you make a purchase worth Rs 50,000 or multiple smaller purchases adding up to Rs 50,000 with your credit card, you can choose to pay the amount in monthly instalments for up to 24 months instead of paying the entire amount at once. However, before opting for this facility, it is important to check the Annual Percentage Rate (APR) of your credit card. Typically, credit card issuers charge interest between 12% p.a. and 36% p.a. for EMIs, and there is a processing fee of up to 1% to 3% of the outstanding amount.

In case your credit does not qualify for credit card EMIs, you may consider taking a personal loan to pay off your credit card debts. However, it is not recommended unless it is the only option left, as it could lead to further debt. You should only consider a personal loan if the interest rate on your credit card is significantly higher than that of a personal loan. It is advisable to borrow only the required amount and avoid the temptation to borrow the maximum eligible amount. Additionally, paying your loan EMIs on time is crucial, as defaulting can harm your credit score. If you have property or securities to offer as collateral, you could consider availing of a secured loan such as Loan Against Property or a Loan Against Securities. However, if your investments are not yielding the expected returns, it may be wiser to liquidate them instead of taking a loan against them.

4. Choose a Repayment Strategy:

To effectively clear off your debt, you should know the various methods available for debt management and choose the one that best suits your situation. Consolidating all your debts, including credit card dues, under one roof could simplify the management of all the debts and help avoid missed EMIs. Furthermore, debt consolidation loans often come with lower interest rates, allowing for savings on interest. For small amounts of multiple dues, debt consolidation loans such as personal loans or secured loans like loans against property or home refinancing make sense. These loans combine all dues under a single EMI at a comparatively lower interest rate, allowing for better management and longer loan tenure to reduce monthly EMI expenses. It is advisable, however, to repay the loan as early as possible to minimise interest costs. A personal loan for debt consolidation carries a higher interest rate than secured loans, so it is advisable only in the case of imminent debt traps.

Another option for repaying credit card debts is the Avalanche Method, where you pay only the minimum amount on all credit card bills and as much as possible on the one with the highest APR to minimise interest costs. The Snowball Method involves paying the minimum amount on all credit card bills and the maximum amount on the one with the lowest debt to clear debts faster. The Blizzard Method combines the Snowball and Avalanche methods, first paying off the smallest debt and then focusing on the credit card with the highest interest rate.

To conclude:

Using a credit card allows you to make purchases even if you do not have the money right now as long as you can pay it back soon. However, practising good financial habits to use your credit card wisely is crucial. Before using your card, you must assess whether you really need to make the purchase and have the plan to pay it back. Instead of relying on credit cards for large purchases, it is a good idea to create a financial plan and consider investing in carefully selected mutual funds. 

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.