Credit card is a very useful instrument, if you use it correctly and pay the full outstanding before the due date. But if you start paying the minimum amount due and opt for the revolving credit, it can lead you to credit card trap.
Credit card carries the highest rate of interest in the range of 30-40%. Even if you have a small outstanding in the credit card, it can grow to a huge amount in short time, if you do not pay it off soon. Another issue with outstanding on credit card is its impact on your credit score. Defaulting on the credit card will have a negative impact on your credit score. This will reduce your chances of getting further loans.
The best thing you can do with your credit card is to settle the full amount before the due date and avoid the roll over credit. But if you cannot settle the full amount the following can help you in reducing its negative impact and save your credit score.
Stop using the card
The first step is to stop using the credit card for any future purchases. This is because the future purchases will not enjoy any free credit. Interest will be charged from the day of purchase. Borrow from your relatives and friends and try to repay to the extent possible.
Convert dues into EMIs
The next step is to ask the bank to convert your dues into equated monthly installments (EMI). The bank may allow this to be repaid over 6 months to 3 years depending on your relationship with the bank. After conversion of dues to EMIs, your credit limit will be reduced to that extent. It will increase as and when you pay the EMIs. At any stage, if you have surplus, you can foreclose the outstanding without any prepayment penalties.
Go for another loan
But if your bank is not ready to convert the dues into EMIs, then approach another institution and try for a secured loan against assets or securities. Such loan will have lesser interest. If that is not possible, then opt for a personal loan. Use this amount to close the card account. Repay the personal loan in time to avoid further complications.
Balance transfer facility
If you are having multiple credit cards, you can utilize the balance transfer option given by the banks. Here as per the offer, you may get around 3 months time to clear your dues. But you may have to pay it in one go.
Pay the maximum amount possible not the minimum amount due
If none of the above options are possible, then try to pay `as much as possible’ every month instead of the` minimum amount due’. If you pay only the minimum amount due, it is very difficult to come out of the trap because of the very high rate of interest.
Go for settlement as a last resort
The bank will be ready for a settlement, if it is sure that you will not be clearing their dues. It may allow you to close the account by paying an agreed sum lesser than the actual dues.
You should avoid this option because it will affect your credit score. The bank will report this to the credit bureaus and it will be mentioned as `settled’ or `written off’ in your credit report. Getting further loans will be very difficult with such a credit report. So, use this only as a last resort.