You spend a big amount on your credit card. You do not have the money to settle the bill in full by the due date. You decide to pay off the debt over the next few months. That means you won’t pay the bill in full right away. You will keep paying whatever you can manage each month and will hopefully settle the debt in full in a few months.
This is an awfully bad approach. Perhaps the worst approach. Firstly, there is no plan. Everything is based on hope. Secondly, this is an expensive approach.
You can do much better than revolving credit card debt in this manner and we will check out the options in this post. However, before we get there, let’s first review the problems with not paying the credit card debt in full.
The Problems with Not Paying Credit Card Bills in Full
- You lose the benefit of an interest-free credit period. You get an interest-free credit period only when you settle the credit card bill in full. If you don’t pay the credit card bill in full, you lose the benefit for all outstanding and future purchases until you settle the bill in full. Paying ‘Minimum Account Due‘ only staves off the adverse reporting to credit bureaus but does not prevent the revocation of interest-free credit period.
- You pay a high rate of interest on the outstanding balance. Credit card debt is the most expensive debt in the formal finance sector with annual percentage rates (APR) ranging from 36% to 45% p.a. And this is before various charges and penalties. As mentioned above, if you don’t pay in full, you pay this high interest rate from Day 1 on not just future purchases but also on outstanding purchases.
- Your credit score may suffer. If your credit score is low, you might find it difficult to access credit in the future. Many banks link loan interest rates to your credit score. Thus, your future cost of borrowing may also go up if you do not pay credit card bill on time. Do not think that you don’t have to worry about a low credit score if you don’t plan to borrow in future. In future, your prospective employer may ask you to attach your credit report with the job application. Thus, a poor credit score can affect your chances of landing your dream job. Do not take this lightly. By the way, you can avoid adverse reporting to credit scores if you pay the ‘Minimum Amount Due’.
What Are Your Options?
The best is to avoid such situations altogether. Do not borrow/spend when you can’t repay in full on time.
However, sometimes, things are beyond your control. Or you misjudge your cashflows or have been plain and simply irresponsible. What can you do in such cases?
- Use Merchant/Instant EMIs. Many retailers (online/offline) allow you to convert your purchases into EMIs right at the time of purchase. If you know that you will struggle to pay the amount in full by the next due date, utilize this option. You will have to pay interest with this option (unless you get the option of No-cost EMI). However, the rate of interest will be much lower than 36-45% p.a. that you will pay on revolving credit card debt.
- Convert purchases to EMIs. You do not have to opt for EMI payments at the time of purchase. Many banks allow you to convert your spends into EMIs even after the purchase. Usually, the interest rate will be higher than the Merchant EMIs but still much lower than credit card debt.
With (1) and (2), you also get an option to choose the repayment period. The longer the repayment tenure, lower the EMI. Choose tenure and EMI you can manage comfortably with your cash flows.
It is extremely important to understand where your finances/cash flows stand. Don’t fool yourself or be in any kind of illusion about your repayment ability. Do an honest assessment. Once you realize that you can’t repay in full by the next due date, explore the options available. If you can’t postpone your purchase/expense, get yourself some cushion by extending your repayment period through EMIs.
As long as you can pay the credit card bill (which will include EMI installments), you will continue to get the benefit of an interest-free credit period. Hence, by converting your purchase to EMI, you achieve the following:
a) Retain the benefit of interest-free credit period
b) Pay a lower rate of interest on the loan (compared to credit card interest)
c) Avoid adverse impact on credit score
With (a) and (b), you also improve your repayment ability. Your cash flow is under less pressure.
Above, I discuss the options available directly through credit cards. However, the aim is just to extend the repayment tenure. And that is possible without credit cards too. For instance, if your credit score is still good, you can opt for a personal loan from any bank/NBFC and use the loan amount to settle the credit card bill. You can then focus on EMIs on the personal loan.
In options (1) and (2), the loan was offered by the card-issuing bank. In this case (personal loan from any bank), you can approach any bank/NBFC for a loan. In terms of operational convenience, (1) and (2) are much better since you get the loan with just a click. If you are applying for a loan from a different bank/NBFC, you will have to spend time and effort.
Alternatively, you have an EMI card like Baja Finserv EMI card, you can use it. Or you can opt for Buy Now, Pay Later scheme (BNPL) if the retailer offers one.
EMI Isn’t the Panacea
You might feel I am singing praises of EMIs. I am not. If you develop fondness for purchasing things on EMIs, you might soon find yourself deep in debt. Don’t do that. In a way, I am merely asking you to choose a lesser evil.
Credit card debt is just too expensive. By converting your purchases into EMIs, you give yourself some breathing space and increase the odds of repaying debt on time. You pay a lower rate of interest and avoid a hit to your credit score. And continue to get an interest-free credit period. This is so much better than being clueless and revolving credit card debt. Just a little bit of awareness can help reduce costs and improve the chances of repayment.
The best option is still to postpone the purchase/expense until such a time you can pay your card bill in full. Do you have that option?