Zip zap zoom. That's how easy it is to spend on your credit card and before you know, the charges could balloon, pushing you deeper into a debt hole. The plastic debt is one of the most difficult to get out of but if already there, don’t panic. There is a way out.
You can see it coming. Bonuses are vanishing, increments are becoming scarce and holding on to jobs is getting stickier each day. All of you can see this happening. When money becomes tight, you know, what's the toughest thing to do?
It is to get used to cutting back on your lifestyle and spending less. In fact, you don’t because credit cards give you illusions of money available to spend. Money, that is not yours, but can be accessed in less than 5 seconds today.
We are raising a red flag, probably ahead of its time but we are against easy spending on your credit cards.
To many of our young viewers, who are high on life, this may seem like a damp squib. But when we do the maths, you'll realize, we're raising the alarm bells for a very serious reason. It is better to be reminded of credit trap than to wish it away.
At 3.5% every month and over 40% per year, that's a costly charge for easy money.
Firstly, what is a credit card?
# It is money you borrow, without having it in your bank
# It is free money for the first 40-50 days
# But if you don’t pay after that, then a 35-40% interest rate hits you
# Did you know that even if you don’t pay just Rs 100 of the bill, you are charged interest for the full amount
# Suppose you spent Rs 30,000 and paid Rs 29,000, the card company will first charge you interest on Rs 30,000 for a month and then on the unpaid Rs 1,000. So, you pay on Rs 31,000.
# You get into a debt trap when you have no way to clear your credit card bills in the next one year
And specially at this time, when there is a job and salary squeeze, the most difficult items to cut are the lifestyle ones. So we need to be extra careful of this plastic in the next two years.
Here's what the banks say they are charging you on revolving credit or for not paying back.
#ICICI Bank- 3.15% to 3.40%
#SBI - 3.35%
#Standard Chartered Bank - 2.49% to 3.40%
#HSBC - 2.75% to 3.20%
#American Express - 2.9% to 3.5%
But when you do the maths, it’s easy to see why falling in a debt trap is so easy.
Let us take a simple example. If you are spending Rs 30,000 every month and repaying half of it, you end up spending Rs 3.6 lakhs in 12 months.
You pay back Rs 1.8 lakhs and owe the bank Rs 1.8 lakhs.
But what the bank wants back is 40,000 rupees more than what you've spent...and keep this going for another year…this will become a runaway figure...
On the same amount of Rs 30,000 spend, if you take it really easy and pay back only the minimum due, that is Rs 1500 a month, you will owe the bank Rs 2.3 lakhs. The bank will demand back, Rs 3.5 lakhs back from you and that’s Rs 1.2 lakhs more than what you've spent. Keep compounding this and you can fairly figure out where this could go.
While these numbers are good enough to scare anyone, I have yet one more number to scare you with. Imagine that you spent Rs 5,000 on your card today. And then you make the minimum payment. You will now pay till the year 2013. You will take five years to pay off this Rs 5000.
Credit card owners beware
If you spend just Rs 5,000 per month and make just the minimum payment each month, it takes you five years to pay it back.
Finer Details
#Repeated delayed payments may have higher charges
#Check the annual fees. It may go up to Rs 50,000
#Cash withdrawal costs big
#Check for mandatory service tax
So here's the final word for all that you need to do to ensure lifelong freedom, from the plastic debt trap, from ICICI Direct.
Steps to freedom from card debt
#Do not roll-over credit
#Spend only as much as you can repay
#Set mobile alerts for payments
#Set limits above which you need an authentication
How about getting out of a debt trap?
You know you are in trouble when you do not have the money to pay your credit card bill in full, even if you pay the most you can, for a full year.
If you are in such a situation, first ask for a loan from family. If that does not work, here is what you can do:
Steps to freedom from card debt
If in a debt trap:
#Take a personal loan. Its cheaper
#Ask the bank to convert it into an EMI
#Work with a debt counseling centre
We mentioned about debt counseling centres, here's the list for these centres. If you are in a vicious trap, please don’t delay, access them right away and give us feedback on how they were able to help you.
Debt Counseling Centres
#Abhay Credit Counseling Centre
#Consumer Education and Research Centre
#Consumer Guidance Society of India
#Disha Credit Counseling Centre