Avoid falling into a debt trap this festive season

Many consumers consider the festive season an auspicious time for renovating homes or purchasing big-ticket items like a car, house, etc. Thus, banks, non-banking financial companies (NBFCs) and housing finance companies (HFCs) offer attractive plans and concessions on their products. However, in a rush to avail such offers, consumers often abandon financial discipline and fall into a debt trap. 

Here are a few tips to reduce the risk of debt traps during this festive season: 

Don’t use credit cards beyond repayment capacity 

Unhindered use of credit cards beyond one’s repayment capacity can land you into a debt trap. Swipe your credit cards only if you can repay the dues by the due date. Failing to repay the credit card bills will cost you dear, the charges can even be up to 49 per cent per annum. Non-repayment of the minimum amount due of your credit card bill will additionally cost you late payment fee of up to Rs 1,300 and even  reduce your credit score.  

Taking on such debt may also impact your ability to pay existing EMIs or make the monthly contributions to crucial financial goals. While failing to pay EMIs will cost you in hefty penal interest charges and reduce your credit score, no/less contribution to crucial financial goals could force you to avail loans at high interest rates.  

Don’t opt for EMI conversion on credit card bills 

Card issuers also allow converting big-ticket spends exceeding pre-set threshold limits into EMIs. The interest rate of these EMI conversions can vary widely depending on the card issuer, EMI tenor and credit profile of the credit card holder. However, the interest rate of such EMI conversions is much lower than the finance charges levied on unpaid credit card dues. So, if you must choose, then it is better to convert the purchase into EMIs than pay the penalty for non-payment of credit card dues. The repayment tenor of such EMIs can range from 3 months to 60 months depending on the card issuer. 

Credit card holders should choose the EMI tenor wisely so that they can comfortably repay the outstanding amount in smaller tranches without incurring high interest cost or adversely impacting their liquidity and credit score. 

Compare various loan options 

Many consumers make big-ticket spends like purchasing a car or a house or carrying out extensive home renovation only by availing loans. However, the chances of loan approval and their respective interest rates vary widely across lenders. So, compare the loan offers from various lenders. Choose the lender that is offering the best loan option in terms of interest rate, margin/down payment contribution, loan tenor, loan amount and expected turnaround time for loan disbursal.  

Check out the loan details from the banks and NBFCs with which you already have a deposit or loan account as many lenders offer preferential rates to existing customers. Then, visit online financial marketplaces to find out the best loan offers from other lenders based on your credit score, monthly income, job profile and other eligibility criteria. 

Avoid withdrawing cash using credit card 

Credit card issuers offer interest-free periods of around 20-52 days on card transactions. They don’t levy interest on credit card transactions if they are repaid by the due date. But the interest-free period is not applicable for ATM cash withdrawals made through credit card. Rather, card issuers levy finance charges of 30-49 per cent per annum on the withdrawn amount. Additionally, the card issuer also charges a cash advance fee of up to 3.5 per cent of the withdrawn amount. These two charges increase the credit card bill significantly, especially if you withdraw cash regularly and leave the debt unpaid for long.  

If credit card ATM withdrawals are unavoidable, repay the entire withdrawn amount at the earliest. 

Use accumulated reward points 

Most banks allow card users to use accumulated reward points to buy things or services or to repay credit card dues. However, usually, reward points come with expiry dates so try to use the accumulated reward points at the earliest. In addition, use the reward points to pay your credit card bill and reduce the debt burden. 

Sachin Vasudeva is the associate director and head of credit cards, Paisabazaar.com 

DISCLAIMER: Views expressed are the author's 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.