Retire credit card debt, if need be with fresh loans

NEW DELHI: With the pandemic impacting most people, millions of Indians are resorting to minimum credit card payment to keep their credit score healthy while postponing paying back debts. Bankers say that while credit card usage has leapt many-fold during the pandemic, the habit of paying minimum dues has also gone up. 

The number of credit card users in 2019 stood at 52 million and this is expected to hit the 60 million-mark by the end of the current year. The problem with paying minimum dues on card spends is that high-cost debt with an annual interest rate of 35-40 per cent annually will pile up creating a plethora of future repayment problems for the card user.

Many individuals have also opted for the moratorium offered by the Reserve Bank to small borrower dues including credit card dues. However, what must be known is that a moratorium does not mean a debt waiver, it merely means putting off any type of payment of debt and interest.

Prudent debt management calls on all borrowers to retire their highest cost debts as soon as possible.  
Typically, this would mean for an individual, credit card dues, followed by high-cost personal loans without collateral which attract interest between 15–30 per cent.

The best way of paying off dues, of course, is through savings. Whenever confronted by high debt levels, it is always a good practise to prioritise expenses and to cut them down besides opting for forced savings.

However, in times of financial stress and rising inflation, reducing expenses becomes a difficult task for most individuals. Under such circumstances, it makes sense to take a fresh loan at a rate lower than that of credit card dues and personal loans.

For instance, if credit card dues amount to Rs 50,000 and high-cost loans with interest rates of 15-30 per cent amount to another Rs 1.5 lakh, it would perhaps make sense to shop around for a loan at a lower rate of between 10-15 per cent, either from banks or from friends and relatives with which to pay off the older and costlier debt and to consolidate one’s borrowings.

However, when taking on new debt two things should be kept in mind – the processing fees charged for the loan should be kept in mind and secondly, the duration of the loan should be preferably longer than the debts being retired as one’s EMI or Equated Monthly Instalment for any loan depends not only on the interest rate but also on the period of the loan.