Mumbai-based 33-year-old Amol Manohar Dalvi, an executive in a private company, is worried. Usually on-time with his credit card payments, Dalvi has seen himself slide back in his payment schedule over the last two months. He’s worried about a default and is looking for a solution: “I don’t want to default and I want to convert my outstanding amount to equated monthly installment (EMI) or any other way that will help me pay lower interest rate.”
Dalvi is not alone in finding himself sliding back on credit card payments. Reserve Bank of India data shows that between November 2011 and November 2012 credit card outstanding of Indian borrowers raised by 26% to Rs. 24,700 crore. The number for the year before that was just 3.7% and for two years before, credit card outstanding had shrunk. “There are two reasons for the growth in credit card outstanding — demand and distribution push. After the 2008 crisis, banks were risk averse and also non-performing assets were increasing from corporates. Hence, banks have shifted their focus to retail,” says Vaibhav Agrawal, vice-president, banking research, Angel Broking.
“Default happens when the cash inflow or income doesn’t match the outflow. The economic situation, such as inflation, can impact a customer’s ability to pay the outstanding amount on his credit card,” says D Sampath, head-retail business, Federal Bank Ltd. Getting into a debt situation is easy, but it is tough to break the cycle of late payments and rising interest burden. Four ways to address this debt.
Transfer the balance
Balance transfer is a facility offered by banks on credit cards where you can transfer your outstanding balance from one credit card to another. There are two types of balance transfers available in the market — fixed duration option and lifetime duration option. The fixed duration option is a limited period offer, usually 3-12 months, where you need to pay your dues within that period of time. During this period, the bank offers you a lower interest rate of around 9% per annum. Some banks may give you a full interest waiver. However, the interest rate offered would vary from bank to bank. Also, if you miss your payment within the fixed duration, the bank will charge you the regular rate of interest, which could be similar to the rate you are paying on the current card. In the lifetime option, you get a lifetime to pay back the dues. But the interest charged isn’t as low as the fixed rate option — it is 12-24% per annum. For getting balance transfer facility, you will have to pay a processing fee, which will be anywhere between R100 to around 2% of the outstanding amount you transfer, depending upon the bank. Once you get in touch with the bank where you want to transfer your credit card outstanding amount to, you will have to give details of your current card to the new bank. After the new bank verifies the details, they will send you a demand draft or cheques within two weeks. The draft will be for the transferred amount in favour of the old credit card bank. Banks that send cheques will send it in favour of the other credit card company.
Convert to EMI
Converting your credit card outstanding balance to equated monthly instalment is another way to pay off your debt. “A few banks give EMI option to pay back the dues. However, if you miss a payment during the EMI option, then the rate will increase to the regular rate of interest your bank charges,” says Anil Rego, a Bangalore-based financial planner. Banks offer between zero interest rate and a low interest rate of 1.49% to 1.99% per month to their existing customers when they opt for EMI. Again the interest rates vary from bank to bank.
Take a personal loan
In case you have missed your credit card payment due date, banks will typically charge you anywhere between 20% and 44% per annum for rolling over credit card outstanding. Also the way the charges are calculated is a little complicated making it more expensive. Here moving to a cheaper product can help. “If you are not able to pay your credit card due, replace the credit card debt with loan products that are cheaper. You can look at personal loans, loan against gold or even loan against property,” says Adhil Shetty, chief executive officer, Bankbazaar.com. Banks charge 12-15% per annum for personal loans. Loan against gold are also cheaper than credit card interest rates. Your bank will be readily willing to give you a personal loan to pay off your credit card debt. As soon as you get a personal loan, clear your credit card debt. “However, don’t default on your personal loan as it will also effect your credit score,” says Surya Bhatia, managing partner, Asset Managers.
Ask for lower interest
“You can always negotiate with your credit card issuing bank to lower your interest rate,” says Suresh Sadagopan, a Mumbai-based financial planner. Banks do it because the competition is fierce and it is any day better for them to reduce the interest rate than add non-performing loans to their books. If you have been defaulting or are rolling over credit card outstanding, you need to coordinate with your bank branch and tell them your financial situation and explain your willingness to pay off the debt if the interest rates are lower.
Yes, there are ways out of credit card hell, but it’s a good idea to stay away from the brink.