Are you using your credit card as an alternative to loans? If yes, then this is not a smart option at all.Its better to abandon the idea completely because interest rates on credit cards over dues have sky rocked. In the last few months, many banks have hiked the interest charged on outstanding amounts to over 40% and banks like ICICI Bank, have taken their rate close to 50% which means not paying your credit card bills on time can be financially disastrous.
As you would be aware, credit card companies allow you to pay a minimum of 5% of the bill amount but charge interest rate on the entire balance if the card user fails to clear the bills in totality. As a result, the option of clearing only 5% of the bill is merely a facility and financially, not a good move. In the current scenario, the option to go for part payment can be more painful due to the hike in interest rates.
For instance, if an individual decides to clear only 5% of his credit card bill of Rs 1 lakh, he would be shelling out an interest of nearly Rs 5,000 (per month) even after making the minimum balance payment. If he fails to clear these dues within a short period of time, chances are that his interest outgo would be higher than the original bill amount!
One of the best ways to avoid interest outgo is to get more disciplined with the payments. Card companies don’t levy any charge if the user clears the bill amount well before the deadline. However, if you are pushed to opt for part payment, look at some of these options.
Pay up as early as possible: There are chances that you may not be able to clear credit card dues in the first month but make sure that you don’t carry the outstanding amount for too long. As pointed out earlier, even when part payments are made, the interest would be carried on the entire statement amount without taking into account the part payment. As a result, even the interest amount gets added to the bill amount and over a long period of time, the liability can get monstrous! So, if you are unable to clear dues in the first couple of months, go all out to arrange funds for clearing your dues. Even if it means dipping into your old savings like fixed deposits, it is not a bad idea because FD fetches an annual interest of 8-9% whereas your credit card makes you shell out 40-50% interest!
While the rates have gone up, credit card cos have also increased a number of card features in recent times and the EMI facility has been one of the useful options. This allows the card user to clear his dues over a short period of 6-12 months and the interest rate is competitive when compared with credit card interest. This option can be exercised when you are sure of lack of funds. However, some card companies offer such a facility on certain products and services and in certain cases, the card user is required to intimate the company about exercising the option. In both cases, the EMI facility can be more advantageous when compared with the huge interest charged on the overdues.
Personal loans can be another option to clear credit card dues though I would recommend you to look at it as a last option. In line with the general interest rates, even personal loans have turned expensive and interest rates range between 16 and 24%. The only good thing about personal loans when compared with the credit card revolving credit facility is that personal loan EMIs also take care of principal repayments.
As you would have noticed, all the above options are expensive and carry a price. Instead, get disciplined with your card usage. Avoid the credit facility on your credit card . Use your credit card only as a replacement for cash. Spend wisely on your card!!