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How does credit card debt works and how to deal with it?

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The circulation of credit card in the country has been reported to be at an all-time high with the user base being at 58 million as on April 2020. It is expected that the number is only set to grow at a CAGR of 25% within 2020-2025. 

It is in backdrop of such rising popularity that you should have a holistic understanding of reduce credit card debt and how you deal with it.  

How does credit card debt work? 

At the outset, a credit card allows you to borrow money within pre-established credit limit and requires you to repay it by the due date. Once a credit card is used for expenditure, the particular amount is deducted from the limit, and on repayment, such amount is added to credit limit. This way, credit cardholder has access to readily available credit.

The credit card debt generated is subject to the below-mentioned aspects – 

  • Credit limit – It includes the ceiling within which expenditure can be made. In other words, a transaction cannot be undertaken beyond the credit limit.

 

  • Interest – Unless repayment is done in full and within the due date, interest is levied on the outstanding balance. It automatically increases the amount that has to be repaid. Interest rate is one of the essential things to know before applying for a credit card. 

 

  • Balance – It is the outstanding amount which has been spent, and not yet repaid.

 

  • Billing cycle – Billing cycle in credit cards include the period extends from one statement date to another. All transactions done within that period would be reflected in the credit card statement. 

  • Minimum payment – If full amount cannot be repaid by a cardholder, then the approved amount which has to be necessarily paid includes the minimum payment. Such minimum payment usually comprises of the equated monthly instalments and charges. For instance, the Bajaj Finserv RBL Bank SuperCard allows for easy EMI conversion even when a personal loan is availed against the available credit limit.

 

  • Interest-free period – This period is the time duration when no interest is levied on expenditure made through the credit card. 

 

  • Credit Utilisation Ratio (CUR)–CUR is the proportion of credit card balance with that of credit limit. The credit utilisation ratio should ideally be kept at 30%. On exceeding this limit, there would be a negative impact of the credit score.  

Different ways to deal with the credit card debt

As mentioned previously, credit card debt includes the aggregate of outstanding balance that is carried over from one billing cycle to another. Let us look at options that are available before a credit card holder in dealing with a credit card debt -

  1. Personal loan 

The credit card dues can be refinanced by way of personal loan. In other words, credit card holder avails a personal loan, and the debt is paid off from that fund. It would help you to get the most out of your credit card. 

Financial institutions like Bajaj Finserv also provide pre-approved offers to facilitate the application process. Such an offer is also associated with financial products such as personal loans and business loans. You can check your pre-approved offer by submitting your name and contact number.

You may wonder how taking out a personal loan can be advantageous over the debt on a credit card. The point of distinction lies in the respective rate of interest levied. While the average rate of interest on a personal loan is 15%, the rate on a credit card can be around 40%, which is more than double. This massive margin of difference makes credit card debt much more expensive as opposed to repaying a personal loan. 

  1. Balance transfer

In case of credit card balance transfer, the outstanding debt on the existing credit card is transferred on another credit card with a lower rate of interest. A second credit card would be offered by a different financial institution. The main advantage in this regard is that, apart from a lower interest rate, there would also be an interim interest-free period.

Another option for dealing with a credit card debt is to let the issuer or a settlement agency settle the debt. Such a measure has a negative impact as the credit score is poorly affected. Availing credit in future would become difficult for the cardholder. That is why, card users are often advised against going for debt settlement as an option to deal with the card’s debt.

 

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