Avoiding the credit card debt trap

For instance, in 2007-08, the value of credit card transactions in India stood at Rs.57,958 crore, up from Rs.41,361 crore in 2006-07 (Year-on-year rise of 40.12 percent).

But, in 2007-08, the total credit card outstanding rose 43.6 percent to Rs.5843 crore and, till May 23 this year, the outstanding shot up by 87 percent to Rs.12,375 crore.

And, coupled with the central bank's move of hiking the key interest rates to suck out excess liquidity from the market and curb credit growth, banks are passing on the buck to customers by charging higher interest rates.

But, those pay their dues on time are being spared, market analyst said.

But not everybody is a financial wizard and can manage to pay on time. According to Kalpana Srivastava of Amrit Financial Services, it is always bad financial planning to spend more than you bring in.

"But with credit cards it is a lot worse because of the fact that interest is charged and can seriously mount up in a very short space of time," Srivastava said.

In such a case, Srivastava said, the credit card user often finds himself in a position where he is not able to cover the monthly payment or feel that the pressure is growing.

"The sooner you admit to the bank you have a problem and seek advice, the more chances you have of being able to resolve the situation in a satisfactory manner. If you bury your head in the sand hoping that it will just go away you will be in big trouble sooner of later as this will antagonize the bank further," she said.

Umesh Kapur, managing director of Tirupati Investment Corp. agrees. For people who have trouble managing their credit cards, Kapur has several solutions.

"First of all, stop using your card. It can be difficult to stop using it completely, especially if you rely on your card for day-to-day spending. However, you must reduce your spending if you want to want off less," said Kapur.

"Second, pay off as much as you can every month. The more you pay off, the less interest you will pay," he said. "Also, pay off more than the minimum payment every month. If you only make the minimum repayment, the amount you owe will reduce very little as interest on the dues will keep piling up."

"Third, think about switching to a credit card that has a low rate of interest, or no interest. Compare the costs and benefits among the main credit-card providers. Doing some homework helps as you can end up paying less interest while you are paying off what you owe," Kapur continued.

"Fourth, make sure you pay off your dues before the end of the interest free or low interest period. Making repayments after the due date can attract huge interests and penalties," he said.

"Fifth, if you are holding more than one credit card, consider using balance transfer facility. Using this facility, you can clear off the dues on one credit card by transferring the amount to another and pay lower interest rates on the dues," he added.

"Finally, consider taking out a personal loan with a low APR (annual percentage rate) to pay off your card. Then cancel your card, or don't use it until you have paid off your loan. Shop around and compare loans of the same amount and term using the APR," Kapur said. "Find a loan with the lowest APR and take it out for the shortest possible term. The personal loan cost comparison can help you compare the loans from the main providers. A longer term will mean lower monthly repayments, but the longer you take to pay it back, the more interest you will pay."

"Once you have succeeded in paying off what you owe, make a deal with yourself to only use your card in certain circumstances and to always pay off your bill immediately, or in the shortest possible time," he added.

According to Kapur, these days, banks are also playing an active role in advising credit card users so that they do not default on their repayments.

"Due to inflation and rising rates, customers are feeling the heat these days. Understanding their problems, banks are coming forward these days and are offering credit card users an option to pay for purchases in installments," Kapur said.

"Many banks offer EMI (easy monthly installment) facility to credit card users these days. As interest on EMI is less than that on normal repayments, it is easier on the credit card user's pocket," he said.

EMI schemes are generally offered on transactions of more than Rs.2000, he added.

Agrees Rupali Roy, investment manager at Globus Investment Co. "Rising interest rates and prices are eating into the disposable income of borrowers, increasing the chances of default. But these days, the banks have become more proactive. In some cases, banks suggest that a credit card user take out a personal loan as soon as he makes a large transaction. Other banks make this offer when a customer fails to make a large payment," she said.

According to Sandeep Bhalla, business manager (cards), Citibank, "Customers who become delinquent are also offered special installment programs called 'settlements,' which ensure structured payments in a timely manner and reduce their overall credit burden."

"We work directly with the customer to understand their overall debt and evaluates their cash flows to ensure that this personalized payment plan is affordable on a monthly basis throughout the tenor," Bhalla said.