Credit cards are very convenient and have become everyday part of our lives. Often we lose control of our spending as it is too easy to make a minimum payment and roll over the payment to next month and then the next and again the next. Before you realize, the debt becomes unmanageable.
Pankaj Jain, 29, sales executive, is a happy go lucky chap. He works hard and loves to have fun too. By the middle of the month he starts running low on cash. Cash withdrawal from the credit card and payments on the credit card seem like the best option to him. Of late, he noted that he has been barely able to pay off the minimum balance due and the total amount due has been rising dangerously. Though he has reduced his spending now, each month the interest has been mounting and it was swelling the total amount due. Pankaj needs some serious debt management.
Steps to manage debt
1.Change the lifestyle causing debt
In most cases debt mounts up due to excessive spending and lack of checks and balances. Very often these are not even big or asset building expenses. Most often, the credit card is whipped out on impulse purchases for clothes, accessories or to pay restaurant bills.
2.Stop using the credit card
Don’t reduce it – just stop. Put the cards in a sealed envelope in the darkest corner of your cupboard. If you have to pay Rs 5000 for a pair of shoes in cash, it will pinch you much more than paying by card. It will also help you curb impulse purchase; after all, you cannot buy more than the cash you are currently carrying.
3.Take a loan
The overdue interest you pay on credit card debt is between 36-40% p.a. This is 10-15% more than what you would pay on an unsecured personal loan and 20-25% more than a secured loan such as a home top up loan or loan against an LIC policy. Look at all your options and do some calculation. Lastly, do not let your ego come in between taking a temporary loan from close family if offered. Avoid settling with the bank or defaults since will reflect poorly in your credit report and you may be rejected for a loan when you need one.
4.Understand where you are overspending
To make change permanent, it is essential to understand the problem areas. Take your credit card bills of the last 1 year and try to figure out which are the high spending items there. Is that Rs1800 shirt you purchased a year ago still in use? Would it not be of much better value if you had brought one for Rs500?
5.Set up a budget
Budgeting does sound boring but wallowing in debt is far worse. So you need to allocate your spending prudently. Until your debt is fully repaid. ALL unnecessary expenses have to be curbed including the evening coffee at Café Coffee day.
When the debt is repaid, one breathes a sigh of relief and then goes back to the same destructive behaviour. It is much like going on a strict diet and then binging. Be prepared for the urge for financial binging. Living within your means is not difficult as long as you have made up your mind to do it.