Recklessly Swiped Your Credit Card During Diwali Sale? Here's How You Can Manage it…

The credit card facility, which could be a boon in an emergency, is often used impulsively during the festive season, especially during Diwali sales when merchants come up with 'do not miss' offers. If you, too, went out of budget to benefit from the limited-period discounts and offers and recklessly swiped your credit cards, then you must be worried about your upcoming credit card bill and its repayment. This article will guide you on how you can manage your Diwali credit card debt efficiently.

Impulsive spending through credit cards can lead to debt overhang and debt trap. It is a situation when it becomes impossible to borrow more and challenging to repay existing dues, typically because of the high rate of interest and high debt-to-income ratio. Hence, to avoid falling into a debt trap, it is necessary to be financially disciplined and control your credit spending. However, if you have already shopped more than your repayment capacity through the credit cards during this Diwali sale, then here are a few tips to reduce your financial burden:

1. Check your reward points:

Credit cards are known for the reward points and cash-back points offered on purchases made through credit cards. If you are an old credit card user, you must have accumulated a considerable amount of reward points on it. These points can be used for further purchases, or you can convert them into cash, and it will reflect a credit entry of the same amount in your next credit card bill. By opting to convert your reward points into cash, you will be able to lower some portion of your dues. However, if you have recently opted for a credit card and made your first few purchases this Diwali, then you might have to wait for a couple of months to redeem your reward points, depending on the terms and conditions of your credit card.

2. Pay as much as you can:

While repaying your credit card bill, you typically get three options - Pay the Total Amount Due, Pay the Minimum Amount Due, and Other Amount. If you are unable to repay the total credit card bill, it is recommended to pay at least the Minimum Amount Due. Paying the minimum amount will ensure you will not be charged late payment fees and that your credit score does not get impacted. However, bear in mind that the credit card issuer will charge you the applicable interest rate for the unpaid amount until you pay the total amount. Hence, it makes sense to pay as much as you can by choosing the 'Other Amount' option.

3. Consider balance transfer:

A credit card with a balance transfer facility allows you to transfer your other credit card dues to the balance transfer credit card. Once transferred, this amount can either be repaid in full or converted into affordable EMIs. Meaning the balance transfer feature can help you delay the repayment by a few more days if you are using multiple credit cards. However, if you are unable to repay the transferred amount in full and have to convert it into EMIs, bear in mind that the interest rate and processing fee could be very high. Hence, it is advisable to compare the rate of interest and processing fee of all the credit cards you hold and then do a balance transfer to take advantage of the EMI option at the best rate. It is advisable to repay as much as you can before transferring the balance, as it will lower your future financial burden.

For instance, suppose you have shopped for Rs 1,00,000, and the minimum amount due is Rs 40,000. Let us say you are in a position to pay Rs 50,000. In this case, it makes sense to pay Rs 50,000 and transfer the remaining Rs 50,000 to the low-interest rate credit card. Now, this transferred amount will reflect in the upcoming bill, and you can pay it with your next month's income. However, if it is not manageable, you can convert it into EMIs.

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4. Convert purchases into EMIs:

The flexible repayment option is the biggest advantage of having a credit card. It allows you to convert a particular high-value transaction or multiple transactions into affordable EMIs. So, instead of paying a huge amount at once, credit card EMIs let you pay it over a period in small instalments. If you do not afford to pay the entire amount at once, converting your high-value transactions into EMIs can be a convenient way to repay. However, you should know that the rate of interest charged on credit card EMIs is very high. It can range anywhere from 12% p.a. to 30% p.a., depending on the credit card terms and conditions. Furthermore, there would be a small processing fee, whereas delayed payment of EMIs or defaulting the repayment will attract high late payment fees. It can also negatively impact your credit score.

5. Liquidate your non-performing assets:

If you are unable to repay the credit card dues in full and the interest rate is too high to convert the purchases into EMIs, it makes sense to look for other options to pay the dues at as low a cost as possible. If you have sufficient savings or investments that are generating below-average returns, it makes sense to liquidate them to credit card debts. However, if your investments are generating higher returns and you do not want to interrupt them, then you can consider availing of a loan against those investments. Loan against investment includes loan against shares, loan against mutual funds, loan against fixed deposit, loan against life insurance policy, etc. Since these are secured loans backed by an investment, the interest rate is relatively lower than unsecured loans like personal loans. However, bear in mind that the lender holds the right to liquidate your investments if you consistently delay the EMIs or fail to repay the loan.

6. Use emergency funds:

Financial experts generally do not recommend repaying your credit card dues or loan EMIs using emergency funds. However, if you have a sufficient amount in your emergency funds and the chances of requiring that amount immediately are less, then you can use a small portion of it to repay your credit card debts. However, make sure you redeposit the used emergency funds at the earliest. If you are not sure whether you will be able to redeposit the used emergency funds immediately or if you think there is a possibility that you might require these funds in the near future, then it might not be a good idea to take out money from the emergency funds.

7. Opt for a low-cost loan:

If you are struggling to repay multiple high-cost credit card loans, it makes sense to opt for a debt consolidation loan. A debt consolidation loan could be a 'personal loan for debt consolidation' or a secured loan like a 'loan against property'. A debt consolidation loan helps you manage your dues better by combining them with a single EMI to pay at a comparatively lower rate of interest. It also offers a longer loan tenure to reduce the monthly EMI expense. However, to save on the interest amount, it is advisable to repay the debt consolidation loan as early as possible. Also, the rate of interest of a 'personal loan for debt consolidation' is much higher than secured loans. You should consider this option only if you are on the verge of falling into a debt trap or are already in a debt trap and need to manage your dues better. Otherwise, if you do debt consolidation for a small number of loans that are not offering much cost-benefit, you might end up paying more than what you were paying earlier.

8. Take help from family or friends:

Many of us avoid borrowing money from family or friends as it can damage the relationship. But it has many advantages like instant availability of funds, low interest, no processing fee, flexible repayment, etc. While you can repay the borrowed money with flexible options, it is advisable to repay it before the promised repayment date, and this will keep your relationship healthy. However, if your family member or friend is unable to help you at this moment, it is equally necessary not to take it personally and damage your relationship.

9. Try to increase your income:

If you have spent on your credit card too much and now the debt has become much higher than what you could afford to pay in EMIs, you should use any extra income to repay the dues. For example, you can use your Diwali cash gifts or bonus to repay them as much possible dues as you can. You can also use the income earned from your hobby or side hassle, rental income, dividend income, etc., to repay your credit card dues. Apart from this, if your spouse is a homemaker, then you both can discuss and work on the possible income opportunities to share some load.

10. Seek professional help:

If the debt is huge and nothing seems to be working, it is advisable to take the help of financial experts or consultants who will guide you to come out of the debt trap as soon as possible. If you cannot afford a financial consultant, take the help of the experts from the bank you have your account. Many people hesitate to seek professional help to take the advice of debt management, thinking that the consultant will judge them for their debt trap. Whereas in reality, they are like financial doctors who are keen on solving your issues without judging if you provide them with the correct information without hiding anything.

To conclude:

The tips discussed above can help you reduce your credit card repayment burden. It is advisable to read all the tips carefully and choose the ones that are suitable for you. If you have overspent than your repayment capacity, then it can be challenging to come out debt-free instantly. However, following financial discipline and controlling your spending will help you become debt-free sooner.

Warm Regards,
Ketki Jadhav
Content Writer