How To Pay Off Credit Card Debt Without Financial Stress
The benefits of using a credit card in everyday life can be many, but only when it is used with extreme financial discipline. Every flexibility and convenience comes with fast paying off credit card bills, and in its absence, the credit card ends up like a grindstone around your neck.
Late payments or defaults on credit bills can negatively impact the cardholder’s credit rating. Any late repayment before the due date is accompanied by high interest on the late payment. Failure to pay a minimum amount due can also result in a heavy penalty from the card issuer. So, despite serious financial constraints, it is imperative that credit card users do not miss paying the bill by credit card. So how do you handle paying bills in a critical situation when finances are tight?
Here are some ways to keep financial stress at bay and pay off credit card debt with minimal long-term implications on your credit report.
Negotiate with the lender
Sometimes it can happen that you’ve taken every precaution possible and found yourself in a bind with no way to pay off your credit card debt. In such a situation, you don’t need to give up hope. Assess your financial situation. If you think you can re-establish card payments after a few weeks or a month, pass the message on to the issuer. Issuers may give you the option of converting your debt into an easy IME or refraining from taking adverse action against you given your position.
Using a low interest loan
Credit cards can be very expensive because they have a very high APR of up to 40% per year. Although credit card IMEs allow you to pay off in installments, they also have a high interest rate. Paying off debt with such a high interest rate can make your financial situation worse. To avoid such a situation, if you think that you will not be able to pay off the credit card bill on time, you should explore other low cost options to organize the money and pay off the credit card owed. .
If you have a mortgage guarantee with the bank, you can apply for a loan against securities, like a loan against FD, mutual funds, or stocks to get a quick loan to pay off the card bill. A loan against a FD can be particularly advantageous because the interest rate would be at the same level as the mortgage rates or even lower. Also, since the lender already has the collateral and your KYC, processing would be quick. You can consider a personal loan to pay off the bill for the card.
A personal loan can be applied online, and the processing time is quick as well. However, it would be a more expensive option compared to a secured loan, although much cheaper compared to what the credit card company will charge you. Remember to check aspects like loan interest rate, associated fees, repayment flexibility, etc. while taking out a loan to settle credit card dues.
Liquidate an existing investment
As a final step, you can consider liquidating one of your investments to pay off credit card debt before the last due date. Try to liquidate such an investment whose return is lower than the interest charged by the credit card company and the tax liability on the return on investment is low and always use it first to pay off the debt which is costing you a higher interest rate. You can liquidate a low-interest FD, partially redeem a debt fund, or take a partial profit on an equity fund that has given you good long-term returns and is less likely to outperform. . The returns you will earn on investments like FDs will be much lower than the penalty interest you will have to pay on overdue credit card bills. The further loss of credit score will take months to improve, and the adverse credit report will last for years. You can always reinvest in such an instrument after a few months when you have sufficient funds.
Anytime you spend money with your credit card, you should be ready with a repayment plan that can help you pay off the bill on time and in full every time. Avoid spending money on your credit card if you are unsure whether the bill will be paid on time. A credit card is only good value for the money as long as you treat it like a deferred debit card and have enough funds in your bank account to pay off the bill before the due date.
(The author is CEO, BankBazaar.com)