- Credit card dues going out of control? Apply for EMI conversion to pay off the debt at a lower interest rate
- Transferring your outstanding balance to another lender at a lower interest rate is also an option for you.
Mr. Shyam Sunder has an outstanding credit card debt of ₹40,000, revolving at the rate of 3.50% per month. In the last 45 days, he made a purchase worth ₹25,000 on the card. Now, Shyam is left confused whether he would be able to come out of the debt. If so, then how, considering his monthly earning and spends of ₹30,000 and ₹20,000, respectively?
Mr. Shyam and you, if facing such a situation, may find it hard to pay off the debt of ₹40,000 in one go. And if you are following the minimum due payment routine, you better stop now to prevent the bills from rising beyond your control. The perils of minimum due payment are already explained in our previous edition.
There are three options by which the credit card debt can be paid off.
First Option – Personal Loan
The best solution here would be to apply for a personal loan. The loan can be availed at a lower rate of interest i.e. 11%-18% per annum. It can be given for a maximum of 5 years. With the loan, the credit card debt can be paid off instantly. In turn, you need to pay personal loan EMIs at a lower rate. Most banks offer a minimum loan of ₹50,000. So, you may have to take that ₹50,000 loan. The processing fee can be around 1%-2% of the loan amount. In that case, the fee can be around ₹500-1,000.
If you get a loan worth ₹50,000 at 15% interest rate for 2 years, how will the repayment pan out? The EMI and interest outgo will be 2,424 and 8,184, respectively.
So, you should cut down on some spends and ensure you pay an EMI of ₹2,424 smoothly each month till 2 years.
Second Option – Convert Your Outstanding into EMI
The first benefit that you are most likely to have by converting the outstanding into EMI is the reduction in the interest rate compared to the current situation of revolving the debt without EMI. The interest rate, as of now, stands at 3.50% per month, accumulating to 42% a year.
With the EMI conversion, you could grab an interest rate deal of 13%-24% per annum. The reduction of rate could thus be to the tune of 18%-29%, quite significant, isn’t it? Plus, the interest would be charged on the reducing balance, which means the payout of interest would decrease over time.
The repayment tenures, if you speak of, can range from 6-24 months. Normally, the tenures given to repay are 6, 9, 12, 15, 18 and 24 months.
However, lenders may not convert the entire outstanding into EMI. Normally, lenders allow EMI conversion within 30-60 days of the purchase. In that case, only ₹25,000 would get converted into EMI and not the entire ₹40,000.
Let’s find out the Equated Monthly Installment (EMI) and interest payable over different tenures to know which tenure option would suit your budget better, assuming you are offered a 17% annual interest rate.
|Tenure (In Months)||Outstanding Balance (In ₹)||EMI (In ₹)||Total Interest Payable (In ₹)||GST Payable @18% on Interest Charged (In ₹)||Total Payment (In ₹) (25,000+ Interest + total GST)|
Keeping a close watch on the table, you will find the interest outflow increases with the increase in tenure. Like many, even you would like to pay less interest, won’t you? Considering your income and saving situation, it’s advisable you keep the tenure not more than 9 months. Following the same would not only save on the interest but also decrease the overall tax payout in the form of GST, abbreviated for Goods and Services Tax.
You can save more to pay the remaining credit card debt of ₹15,000 in a span of 3-4 months.
How Can You Convert Card Outstanding into EMI?
You can request the current lender to get your outstanding converted into EMI in person or online. Yes, you can visit the nearest bank branch or log in to net banking to do so. Even a call to the 24×7 customer care number can help convert your transaction into EMIs.
Third Option – Balance Transfer to Another Lender at a Lower Interest Rate
You can search for attractive balance transfer options offered by other lenders at a lower interest rate. As your credit card dues are revolving at 3.50% per month, you should look for a lender willing to take over the outstanding balance at 3% or lesser. The benefit of card balance transfer is the 20-50 days of interest-free credit. Look to transfer the outstanding balance to a lender not charging you a processing fee, which otherwise can be levied at 1%-2% of the transferred amount.
Just in case you find a lender offering you 50 days of interest-free credit, you can tighten your purse for a while to save more. A major chunk can be paid off to cut down the overall outstanding amount. Suppose you pay ₹15,000, accounting for nearly 40% of the outstanding amount, in 50 days, the balance would reduce to ₹25,000. Assume the interest rate offered to be 2.75% per month on the balance transfer. In the given scenario, how long the debt will take to get over? Let’s find out in the table below.
|Month||Starting Balance (In ₹)||Interest (In ₹)||GST @ 18% on interest charged (In ₹)||Estimated Card Bill (In ₹)||Card Payment (In ₹)||Ending Balance|
Note – Interest Calculation Formula – [(Starting Balance x Rate of Interest Per Month x 12 x number of days in a month/365)]/100
The debt would, thus, get over in 6 months plus 50 days, approximately 8 months.
Assumptions Made to Calculate the Repayment Summary via Balance Transfer
You are assumed to pay ₹5,000 on a monthly basis. The assumption is made taking into account the income and overall expenditure pattern. You are left with ₹10,000 to pay for the card spends after paying the normal monthly expenses from the earnings. So, it seems viable for you to pay ₹5,000 out of that and save the remaining ₹5,000 in the bank account for any instant need that may arise.
The interest calculation is made taking into account 30 days in a month. Some months can be of 28, 29 or even 31 days. So, the actual amount would vary ever so slightly.
It’s advisable for you to avoid any fresh purchase or withdraw cash via credit card till the time the transferred balance is paid off in full. The calculation is made keeping these things in mind. In the event of purchase or cash advance, the card dues would surge and take more time to get over.