Struggling with credit card debt? You make small payments on your credit card every month, but the debt just does not seem to go down.
Why Does This Happen?
Because credit cards are the most expensive debt in the formal finance sector. The interest rate ranges from 36% to 45% p.a.
While you may be able to prevent adverse reporting to credit bureau by just paying the Minimum Amount Due (MAD) (usually 5% of the amount due), you won’t make much progress with the credit card debt if you just keep making minimum payments. After all, monthly interest is 3 to 4%. You can’t make much progress by paying just 5% of the outstanding amount.
And your pain does not end there.
If you are only making the minimum payments on your card, you also lose out on the interest free credit card period. On future purchases (until card debt is fully settled), you pay interest from day 1 of purchase. Not difficult to see how credit card debt can quickly suck you into a debt trap, isn’t it?
Hence, if you continue to use your credit card despite making only minimum payments, you are only compounding your problems.
Can a ‘Credit Card Takeover Loan’ Help?
Nomenclature may vary. ‘Credit Card Takeover loan’ or ‘Balance Transfer loan’. But the idea remains the same. Take out a lower cost personal loan and use the loan amount to pay off the credit card debt. This approach has multiple benefits.
- Personal loans have a much lower interest rate than credit card debt. And this can make a big difference.
- A personal loan will allow you breathing space. You can repay the entire loan amount in the form of EMIs. With credit card debt, to avail interest-free credit period, you must pay off the entire credit card debt by the due date.
- Paying Rs 27,077 per month for 12 months (Loan of Rs 3 lacs at 15% p.a. for 12 months) is much easier than paying Rs 3 lacs in the next 30 days.
| Rs 3 lacs credit card Debt Vs Personal Loan of Rs 3 lacs to pay off credit card debt. Monthly Payment of Rs 27,077 | ||
| Difference | Credit Card Takeover Loan | Credit Card |
| No. of months to close the debt | 12 | 13.5 |
| Interest-free credit period on future purchases on credit card | Yes | No |
| Adverse reporting to CIBIL | No | No |
I have considered only personal loans in this article. You may consider a secured loan too (say a gold loan) where the rate of interest may be lower. For a small secured loan, your credit score is less of a problem.
How to Get a ‘Credit Card Takeover Loan’ (Personal Loan)?
Getting a personal loan should be easy if your credit score is still decent. And for that to happen, you should at least be making minimum payments (MAD) on your loans. Essentially, you must be proactive. Consider this option before non-payments on card debt ruin your credit score.
There are specialized products for takeover of credit card debt: Balance transfer loans, Credit Card Takeover Loan, or any other nomenclature. A quick Google search query will list down quite a few names.
Specialized products may allow borrowers to pay only interest for a few months and the principal repayment would start only after the expiry of such period.
Advertising a product is one thing but actual lending must be prudent. Hence, despite all the aggressive (and comforting claims), your credit profile would still be considered before approving such a loan.
A Few Points You Must Consider
Note that a personal loan will only get you some temporary relief and extend the repayment period. The personal loan must eventually be repaid too. And unlike credit cards, you don’t have the concept of minimum payments on personal loan. You must pay the EMI in full or else it is a default and will be reported to credit bureaus.
Hence, if you are struggling with credit card debt and are planning to take a personal loan to get some repayment relief, do consider the repayment tenure of the loan.
Longer the repayment tenure, lower the EMI. And greater the relief in terms of monthly cashflow pressure. But yes, you pay more in absolute terms if the tenure is longer. Just to give an example.
- Rs 3 lacs loan at 15%. For 12 months: EMI of Rs 27,077. Total Payment of Rs 3.25 lacs to close the loan.
- Rs 3 lacs loan at 18%. For 24 months: EMI of Rs14,545. Total Payment of Rs 3.49 lacs to close the loan.
Additionally, try to understand why you found yourself in this situation. Did you not have enough savings? Did a life event force you into this debt? Did you spend too much? What can you do so that such things do not happen again in the future? Would a separate contingency fund have helped? Would robust health coverage for the family have reduced the burden? Or you simply need to control your urge to spend and be responsible with credit. This introspection and subsequent remedial action are very important.