The numbers in the recently published Reserve Bank of India (RBI) Annual Report (2017-18) indicate that Indians are loading up debt. Household debt has risen to 4 per cent of gross national disposable income (GNDI), up from 2.4 per cent in 2016-17. A large part of this is personal debt, including credit card
debt. Credit card loans
stood at Rs 690 billion at the end of March 2018.
The foremost issue with credit card
debt is that it is very expensive. You may be charged 2-4 per cent per month on your card balance. On an annualised basis, including penalties for late payment, yearly outgo can rise as high as almost 60 per cent.
Borrowers need to be cautious on how much credit card
debt they take. Says Parijat Garg, vice president, CRIF Highmark, a credit bureau: “A person's EMI
should not exceed 40 per cent of his net salary. Unsecured debts should be limited to 10 per cent of net salary.” Those who have no other EMI
running may allow the EMI
on their unsecured loans
to creep up to 15-20 per cent of salary.
Those who have piled up credit card
debt and are having trouble repaying it may opt for a personal loan, whose interest cost is lower. Interest rates on personal loans
range from 10 to 20 per cent. “If you have a good credit score, getting a personal loan to clear your credit card
dues should be easy,” says Navin Chandani, chief business development officer, BankBazaar. The tenure of personal loans
ranges from one to five years, which gives card users the time to pay their dues.
Card providers make offers to debt-laden customers, who need to evaluate them carefully. “Many credit card
providers also offer zero per cent APR
(annual percentage rate) on the dues for the first few months. But then they reduce the grace period on new payments made with the card,” says Rachit Chawla, founder and chief executive officer, Finway Capital.
The second option that borrowers can exercise is to convert their credit card
debt into EMIs, without availing of a personal loan. “Credit card
users can either convert their entire dues into EMIs
or select card transactions beyond a threshold limit into EMIs," says Naveen Kukreja, chief executive officer and co-founder, Paisabazaar.com. However, a processing fee of up to 2 per cent of the amount converted is charged. Card issuers charge 13-22 per cent per annum on the amount converted into EMIs.
Banks take a call on whether to convert your outstanding into an EMI, depending on your repayment history. “Lenders take into consideration the EMI
to income ratio at the time of loan application. The chances of loan approval are higher if your EMI
is within 50 per cent of your monthly salary,” says Sujata Ahlawat, vice president and head, direct to consumer interactive, TransUnion CIBIL.
If your bank turns down your request, you can turn to digital lending platforms and P2P (peer-to-peer) lenders, who provide loans
to individuals with a poor credit score or don't have a credit score at all.
"In the past two years, we have seen an increase of 15-20 per cent in the number of people taking personal loans
to pay off credit card
dues," says Gaurav Chopra, founder and CEO, IndiaLends. These fintech firms are quicker to disburse credit than banks. But their loans
come at a higher rate of interest, starting from 14-15 per cent and going as high as 45-50 per cent per annum. Their interest rate depends on the borrower's age, employer, etc. Most importantly, the interest rate increases if you miss your payments.