How to Avoid Debt Trap of Credit Cards

A credit card is an excellent tool for managing finances, saving money, and building high credit scores for those who exercise financial discipline. Yet, many consider it as a gateway to the debt trap. Those who fall into a credit card debt trap usually do so by incurring steep finance charges on unpaid dues.

 Let us look at some tips that can help you to avoid incurring hefty finance charges while using credit cards- 

Spend Only What You Can Repay

 Credit card issuers levy finance charges if the cardholders fail to repay the outstanding dues by the due date. This can also lead to revocation of interest-free period on all fresh credit card transactions until the outstanding dues are repaid. Moreover, card issuers charge late payment fees if the users are unable to repay the minimum amount due within the specified time frame. This may pull down their credit score and thereby, future loan and credit card eligibility. Thus, always factor in repayment capacity before swiping the credit card. In case you cannot clear the entire dues within the specified time limit, try to repay the minimum amount due and avoid making fresh credit card transactions till the unpaid dues are fully reimbursed.

Choose EMI Conversion Option 

 Credit card users who are unable to repay their entire bill by the due date should consider converting outstanding bills into EMI (Equated Monthly Installment). Card issuers also allow the option to convert selected big-ticket transactions beyond the pre-determined threshold amount into EMIs. The interest rate incurred on such EMI conversions is much lower than the finance charges levied on unpaid credit card dues. Moreover, as the EMI tenure can range anywhere between three and 60 months depending on the card issuer, card users should choose one based on their EMI affordability. Cardholders may continue to avail the interest-free period on newer transactions once they convert the unpaid dues into EMIs.

Avoid Withdrawing Cash through Credit Card

 ATM cash withdrawals made through credit cards incur charges right from the day of cash withdrawal until it’s fully repaid. Additionally, such ATM cash withdrawals also incur cash advance charges of up to 3.5 per cent of the withdrawn amount. Hence, try to avoid this as much as you can. If it becomes unavoidable, make sure to pay off the entire amount as soon as possible to avoid accumulating finance charges. 

Opt for No-Cost EMI Options for Big-Ticket Spends

Credit card issuers tie up with merchants, manufacturers, service providers to offer no-cost EMIs on purchasing select products or services. The interest cost incurred in these tie-ups are borne by the merchants, manufacturers, service providers and the card users only need to repay the purchase cost in the form of EMIs. However, the GST levied on the interest component has to be borne by the cardholder. Some credit card issuers also offer additional discounts to their customers on purchases made through no-cost EMI options on the basis of their tie-ups with the merchants or manufacturers. 

 Hence, those wishing to make big-ticket spending but lack repayment capacity should search for no-cost EMI options available on those spends through their existing credit cards. This would allow them to repay the purchase cost of their preferred items in the form of EMIs, as per their repayment capacity, and without incurring any finance charges or interest cost.

The author is the Director of Paisabazaar.com

DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.