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Is your credit card getting the better of you?

By Rajiv Raj
June 19, 2015 12:37 IST
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It all begins with a little overspending on the credit card, and before you know it, you find yourself being sucked into a debt trap. You may think you have a debt pay off plan, but think again.

Take a closer look and see if you have any of the following tell tale signs of being buried under a pile of credit card debt, cautions Rajiv Raj!

The power of plastic money remains till such time that you pay your outstanding balance in full well before your due date. However, most people tend to go overboard when it comes to spending money on their credit cards. Each one has the intention of paying off their outstanding balance, but as debt keeps on piling, they soon find themselves scraping through by paying the minimum amount due each month. Not only is credit card debt, the most expensive form of debt, revolving credit also has a damaging influence on your CIBIL score, and may bring it crashing down. If you are heading towards a situation where your credit card debt may spin out of control, it is most likely that you are displaying one of more of following signs.

You dread opening your credit card bill

The worst thing that can happen to a credit card user is being shocked by one's credit card bill. If you are worried about opening up your bill, for you know that it will contain a number that is way beyond your repayment means, you have a problem at hand. Worse still, if you do not even open the bill and just pay the minimum amount due each month, thinking you will receive a windfall someday to pay off your credit card debt at one go, you are literally digging your own grave!

You don't know when you will be debt free

If the unpaid balance on your credit card is substantial and if you have no idea by when you are going to able to pay it off entirely to be debt free, you are not in a happy situation. Even if your credit card balance has gotten out of hand, you need to take the bull by the horns and sit down with pen and paper to chalk out a repayment calculation to be credit card debt free.

If you cannot chalk it out yourself, take the help of a financial planner or approach a credit repair agency. It will not be an easy task, but it is a first step towards financial redemption!

You are thinking of shuffling around debt

The credit card market in India is intensely competitive and credit card issuers are likely to be reaching out to you everyday with attractive offers on their respective cards. They even tell you that you can transfer your outstanding debt from one card to another and the interest rate will be zero or nominal in the first few months. 

While this may seem like a delectable offer if you know that you are reeling under credit card debt, what the new card issuers may not tell you upfront, is that the balance transfer is nothing but a smoke screen of sorts.

You may think you have temporary relief, but what you may not know is that all of it is going to come at a price. 

Not only will you have to pay a balance transfer fee that can be between 2-3 per cent of the transferred amount (depending upon the bank), the amount of balance that can be transferred is capped at 75 per cent of your total outstanding amount.

So it effectively works out to be a double whammy for you. Besides, if you choose to close your previous credit card, your overall credit utilisation comes down. This is also a potential deterrent to your CIBIL score.

If you have a credit card outstanding balance that you think has gotten out of control, it is better to approach your existing lender to ask for easier repayment terms or an interest rate waiver for a few months. Most banks are unwilling to let go their customers and are likely to offer you a plausible solution for faster repayment.

Your CIBIL score is going downhill

It is important to keep a hawk eye on your CIBIL score and CIBIL report, as it is a measure of your financial health. If you find that your CIBIL score is dipping, it is probably on account of your repayment history. The repayment history has the most important bearing of 35 per cent on your CIBIL score, and if you have not been paying your outstanding amount before the due date each month, over time your debt will pile up, thus bringing down your CIBIL score.

Thus, as you can see, unpaid credit card outstanding balances can be intensely damaging to your financial health and can destroy your peace of mind. The key, is therefore to keep a check on your spending and pay off your outstanding balance on your credit card at least five days before your due date.

However, if your credit card debt, has already gotten out of control, it is important to keep your head on your shoulders and work out a repayment plan as soon as possible. It will be an uphill task for sure, but it is really the only way to rectify your financial situation and also bring CIBIL score up to a satisfactory level over a period of time.

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

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Rajiv Raj