While Indians have been traditionally known to be averse to credit, the picture seems to be changing. According to recent data from the Reserve Bank of India, the total outstanding on credit cards soared to Rs 59,900 crore at the end of September 2017, from Rs 43,200 crore a year ago, a rise of 38.7 per cent. Over the past two years, credit card outstanding is up 78 per cent. In April, a survey by TransUnion Cibil, India’s leading credit bureau covering 1,100 consumers across eight cities, had found that while 92 per cent of respondents paid more than the minimum balance (five per cent of total balance) each month, a significant 33 per cent were uncertain about the significance of paying more than the minimum amount due. As credit card usage rises, clearly people need to get more savvy about them to avoid falling into a debt trap.
Pay off your dues every month: Avoid revolving your debt, since the interest charge is a steep 18-47 per cent. “It is the worst kind of debt trap, since the amount due compounds rapidly. Many people also begin to withdraw cash using their credit card, which attracts withdrawal charges. So, then they also pay interest on the withdrawal charges,” says Rajat Gandhi, founder and chief executive officer (CEO), Faircent.com, a peer-to-peer (P2P) lending platform.
Avoid having too many cards: “You could miss out on payment for one or the other and inch towards a debt trap,” says Harshala Chandorkar, chief operating officer, TransUnion CIBIL. Utilising your card limit to the hilt is also not advisable. Also, check your debt-to-income ratio frequently. “If over 45 per cent of your income goes into paying EMIs, it’s a cause for concern. The red light should also flash if over 25 per cent of your income goes towards paying EMIs of non-mortgage loans and discretionary spending,” adds Chandorkar.
Once the level of your credit card debt crosses two months of your take-home salary, take decisive action. Liquidate your fixed deposits and other low-yield instruments (but preferably not provident fund, pension fund and insurance) to pay off credit card debt.
Convert to EMI: As soon as you buy something using a credit card, your bank urges you to convert it into an EMI (equated monthly instalment). “Credit balance transfer can be a good proposition for card holders if they are able to pay off the balance during the promotion period. The interest rate during this period can be as low as zero per cent and the length of the period can range from two to 24 months. Once the promotion period is over, a higher interest rate applies,” says Sahil Arora, vice-president and head of payment products, Paisabazaar.com. The seller usually pays the interest cost during this period. Sometimes, banks, too, offer an easy repayment option on big-ticket transactions where there is no interest cost. But, this is given only to privileged customers. Usually they charge 14-24 per cent and a processing fee of 1.5 per cent on such EMI schemes. Avail only if the terms are more favourable than for a personal loan.
Moreover, the usual interest-free period of 50–55 days is not available on fresh credit card transactions until the transferred balance is repaid fully.
Loans from banks/NBFCs: You could also take a personal loan from a bank or a non-banking financial company (NBFC). The interest rate ranges from 11 to 32 per cent, depending on the customer’s profile. A realistic rate from a bank is 14 per cent and above. “Top-up home loans for existing borrowers and loan against securities (rate 11 per cent and above) are other options. Those with massive credit card debt can consider a loan against property, where the interest rate is 9.4 per cent per annum and tenure can be up to 15 years,” says Arora.
Fintech lenders: Many people in a credit card debt trap may not be able to get a personal loan from a leading bank or NBFC. “Banks focus primarily on lending to salaried employees from the top 6,000-8,000 companies. Unless you work for a highly-rated employer, have an income above Rs 6 lakh per annum, and a good credit score, you won’t get a personal loan from a bank. You stand a better chance with a fintech lender,” says Aditya Kumar, founder & CEO, Qbera.com. He adds that typically a bank will not consider your application if you have a credit score of less than 740, while a fintech lender could go as low as 650.
The online application process is simple and disbursal quick. “We take four hours from the time of application to approve the loan. If the customer is ready with his documents, we can disburse the loan in 24-48 hours,” says Kumar. Qbera’s interest rates range from 13.99 to 24 per cent. Factors that determine the interest rate include your credit score, information in credit report about past repayment behaviour, work experience, etc. Their loan tenure is one to five years and there is a 12-month lock-in during which you can’t prepay.
Loantap.in has designed a specific credit card takeover loan where the interest cost is 1.5 per cent per month (18 per cent annually). Its tenure is 11 months. “The borrower has to pay only the interest each month. He can repay the principal anytime at his convenience over the tenure,” says Satyam Kumar, CEO and co-founder, Loantap.in.
Peer-to-peer (P2P) lending platforms: Another option you can turn to is a P2P platform. “Around 25-30 per cent of the applications we get are to repay credit card debt,” says Raghvendra Pratap Singh, co-founder, i2i Funding. He adds that once a person’s credit card debt starts compounding, his credit score dips, due to which he finds it difficult to get a loan from a formal financial institution. When a borrower applies, his application is vetted and then uploaded on the platform, after which lenders registered with the platform come forward to lend.
The interest rate depends on the customer’s profile. In the case of i2i, it ranges from 12 to 30 per cent. “If you are a salaried professional, work for a reputed company, your take-home salary is Rs 30,000-40,000, and your debt-to-income ratio is not high, you can get a loan at 18-22 per cent,” says Singh. Faircent.com charges an interest rate of 14-20 per cent.
One shortcoming of a P2P platform is that even if you meet all the loan criteria, a lender has to be available at that point who is interested in giving money to a borrower of your profile.