Credit card debt is like a black hole that sucks your hard-earned money into exorbitant interest payments. Ultimately you land up repaying a lot more than you spent in the first place. We all know this, especially the frequent credit card user. But still, people persist with this habit. Because of the lure of easily available money, without questions asked.
Take a quick look at some of the alarming headlines on credit card debt that have hit the newspapers recently.
Rs 1 lakh Crore credit card loans at risk of COVID-19
– BUSINESS TODAY, SEP 2020
SBI report on rising online credit card usage: How to avoid a debt trap
-MONEYCONTROL, OCT 2020
The average American has $90,460 of debt
– CNBC, DEC 2020
The statistics available in the public domain about credit card debt are really worrying, especially because the younger generation (under the age 30) seem to be the most debt ridden.
- Non-payment of credit card dues raises from Rs 329 crore in Q3 2019-20 to Rs 485 crore in the Q2 2020-21 and Rs 862 crore in Q3 2020-21 — a 162 per cent rise.
- Accrued interest rate on unpaid balances is at over 40 per cent per annum, overdues will be a big burden on customers.
- Total credit card outstanding is at Rs 1.04 lakh crore till this financial year upto Q3 2020-21.
- SBI Cards & Payments, India’s largest credit card issuer, has seen its gross NPAs doubling to 4.29 per cent in the second quarter (July-September) of 2020-21.
The six-month loan moratorium announced by the Indian government to provide relief to small and middle-income borrowers was meant to be a temporary relief for borrowers. But it has been counterproductive for many individuals. Borrowers find themselves in a large pool of debt, especially those who opted for the moratorium have seen their equated monthly instalments (EMIs) shoot up as the interest kept accruing during the moratorium period. The compounded interest rates accrued have resulted in hefty monthly dues, considering that the initial interest on such borrowings is already very high.
It is a crisis of enormous proportions. Unless borrowers take immediate corrective steps to get out of this mess, credit card debt is capable of destroying the mental peace and financial security of an individual, especially the youth.
We have put together some simple but necessary actions that you need to take to relieve yourself of this crisis.
1. Watch your expenses, there is no substitute to that.
Use the spend analyser utility on your credit card bill statement, figure out which are the top areas which suck your money. Quite true to Pareto’s principle, you will find 80% of the expenses to be in the Top 20% of spend categories. In India, the top areas of expenditure are food, emergency medical bills, clothing & accessories and travel. Unless you know where your money is going, you will not be able to work out your remedial measures. That simply means setting yourself some corrective goals and faithfully meeting them. Such as – Cook more at home, order less. That will save you money in 2 areas – dining and medical expenses! Other solutions will depend on your individual expense areas.
2. Follow these Credit Card best practices.
Set a standing instruction for payment to your credit card from your savings account. So that the bill amount automatically gets repaid within the balance due date, every month. By paying your EMIs on time and clearing your full balance each month, half the battle is won. Avoid taking cash advances on your credit card. Never, ever have more than one credit card. One is bad enough. Consciously replace the credit card by the bank debit card in your wallet. Remember, using a credit card responsibly is not the ultimate solution. Getting rid of it is what matters.
3. Switch to UPI based mobile payments. They are even more convenient.
Many of the credit card users swear by the convenience it brings over cash payments. UPI based mobile wallets offer you the same or even more convenience. The first point in the favour of using UPI based payments is this – you only spend the money that is already in your account. So it is essentially like an interest free debit card, not a credit instrument at all. When your bank balance is low, you will automatically become cautious about your spends. Whereas with a credit card, it is like a blind alley, you just don’t see what your financial position is, while you are spending.
4. Emergency unplanned expenditure is one of the biggest threats.
You can cut down on eating out, buying excess clothes and some other indulgences. No problem. But what can you do to avoid sudden medical or family emergencies? Nothing. These are bound to occur in every individual’s life. The best way to prepare yourself for such eventualities is to set aside a contingency fund. These can be invested in easy liquidity instruments such as debt mutual funds, chit funds. These instruments have the dual advantage of reasonable, secure returns and easy withdrawal facility.
The pitfalls of using credit cards indiscriminately are enormous. A financial instrument which can serve as a viable alternative for many of your financial needs is chit funds.
Chit funds may sound like a completely different kind of financial instrument. But in many ways, chit funds can help you in getting rid of the credit card debt trap. How, you may ask. A quick summary below:
- Chit funds by design are a dual purpose financial instrument. They are an easy mode of saving as well as borrowing.
- For known expenses that you are likely to incur in the short to medium term, you can plough in your excess revenue into an appropriate chit fund scheme for a tenure of 2-3 years. So when it’s time for the actual expense, your money is ready to use! No debt, no interest.
- If in the mean-time, you are faced with a financial emergency, the chit fund gives you a quick liquidity option to tide over the crisis.
- In a chit fund scheme, even if you pull out the entire amount early, your monthly payments cover both the principal and interest. Thus leaving you debt free at the end of the tenure.
Interested? Want more information? Get in touch with us. We will be glad to help.
Shantala Chits is in the business of chit funds for over 2 decades now. We are a Government approved chit fund company with a 24 year successful track record and thousands of satisfied customers. Shanthala Chits is registered under the Chit Fund Act of 1982, Government of Karnataka. We are one of the most popular chit fund houses based out of Bengaluru, known for our customer satisfaction and secure investments. Get in touch with us and start with an investment scheme. We will be glad to help you out with the right scheme that matches your needs.
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