Credit Card debt: What is it & how to escape it?

Understanding and managing a Credit Card debt has become crucial for financial health in a world increasingly reliant on credit. This guide aims to demystify the meaning of Credit Card debt, providing insights into its mechanics, management strategies, and how innovative banking solutions can turn the tide in your favour.

What is Credit Card debt?

The meaning of a Credit Card debt is essentially the money you owe to the Credit Card company due to the purchases made with your Credit Card. It operates like a form of unsecured loan: you borrow funds up to your credit limit and are obligated to repay this amount. If you don't pay the full amount owed by the due date, the remaining balance is carried over to the next month as debt, accruing interest.

For example, if you spend ₹30,000 on your Credit Card and only pay ₹5,000 by the due date, the remaining ₹25,000 becomes your Credit Card debt. This debt will then incur interest, often at a high rate. If the annual interest rate is 20%, your debt will increase by approximately ₹416 in a month, assuming simple interest. Thus, the debt can quickly grow if not appropriately managed, making it essential to pay off balances timely to avoid a debt spiral.

Benefits of Credit Card debt

While the 'Credit Card debt' definition often carries a negative connotation, it's not all bad when managed wisely. Here's how carrying a bit of CC debt can actually be beneficial:

1. Builds your credit history: Regularly using a Credit Card and paying off debt on time helps build a strong credit history. A good credit score is crucial for future financial activities like loan approvals and mortgage applications.

2. Rewards and perks: Many Credit Cards offer rewards, cashback, or purchase points. This implies that you also earn something back while spending, which you can later redeem for various benefits.

3. Helps in emergencies: Credit Cards can be a lifesaver during unexpected financial emergencies. They provide a quick source of funds when you might not have immediate cash available.

4. Convenience and flexibility: Credit Cards offer the convenience of making purchases even when your bank account doesn't have sufficient funds, giving you the flexibility to pay later.

5. Improves financial management skills: Managing Credit Card debt requires discipline and planning. This process can significantly enhance your budgeting and financial management skills.

6. Interest-free periods: Many Credit Cards offer interest-free periods. If you pay off your debt within this period, you effectively borrow money for free.

7. Global acceptance: Credit Cards are widely accepted worldwide, making them a convenient option for international travel or online purchases from foreign websites.

8. Purchase protection: Credit Cards often come with added protections like insurance on purchases, extended warranties, or fraud protection, which can save you money and hassle.

9. Credit utilisation ratio: Using a portion of your credit limit and paying it off regularly demonstrates responsible credit use, which can positively impact your credit score.

Resolving your debt

Addressing your Credit Card debt begins with a comprehensive evaluation of your financial situation. The process entails creating a detailed budget to monitor your spending, which helps in identifying potential areas where you can cut costs. Additionally, prioritising your debts is crucial – determining which debts to pay off first based on interest rates and balances.

In addition to these steps, considering Credit Card debt relief options can be a significant part of your strategy. Credit Card debt relief refers to various strategies or programs that help reduce or manage the burden of Credit Card debt. This can include debt consolidation, debt management plans, or even balance transfer Credit Cards. Tailoring relief options aim to assist individuals in reducing their debt load, lower interest rates, and achieve a more manageable repayment schedule.

Also Read: How to pay off Credit Card debt faster with a balance transfer

Acknowledge the Credit Card problem

Acknowledging that Credit Card debt is a problem is the first step towards resolving it.

This realisation often comes from noticing how debt affects your monthly budget or stress levels. Once you acknowledge the issue, you're in a better position to create a structured plan to tackle it, which may include setting spending limits and devising a repayment strategy.

In addition to self-managed strategies, seeking Credit Card debt counselling can be an effective course of action. This involves seeking guidance from financial experts who specialise in helping individuals manage and reduce their Credit Card debt. Counsellors can offer personalised advice and help create effective budget plans. This service is particularly beneficial for those who feel overwhelmed by their debt situation.

Impact of Credit Card settlement on your credit score

Opting for a Credit Card debt negotiation and settlement, where you pay less than what you owe, can significantly damage your credit score. While it may offer short-term relief from debt, it has long-term consequences, including making it harder to obtain loans in the future.

Considering these repercussions and exploring other debt settlement options is essential.

How to get out of a Credit Card debt?

Getting out of Credit Card debt requires a combination of debt management strategies like disciplined budgeting, strategic debt repayment, and, sometimes, lifestyle changes. Prioritise paying off debts with the highest interest rates first while maintaining minimum payments on others.

In your journey to becoming debt-free, it's vital to adopt strategies that align with your unique financial situation. Two particularly effective methods to consider are:

Credit Card debt repayment plans: This is the process of paying back the money owed on Credit Cards. Achieving this involves employing various methods, including making regular payments exceeding the minimum requirement, making lump-sum payments, or adopting structured repayment plans. The aim is to pay off the outstanding balance efficiently, minimising interest costs and reducing Credit Card debt over time.

Debt snowball method: This is a debt reduction strategy where you pay off debts from smallest to largest, gaining momentum as each balance is paid off. While making minimum payments on all debts, you focus on paying off the smallest debt first, then move on to the next smallest, creating a 'snowball effect'. This method can motivate by providing psychological wins as it quickly clears smaller debts.

Debt consolidation loans: Since a personal loan doesn't require collateral, it is the most widely used tool for debt consolidation. Personal loans also have a speedy approval and disbursement procedure. Pre-qualified/pre-approved loans with immediate disbursement are available to customers with strong credit histories and credit scores.

Credit Bureau reporting and analysis

Credit bureaus collect and analyse your Credit Card usage and payment history to create your credit report and score. Regularly reviewing your credit report is essential to understand your financial standing and to spot any errors or fraudulent activities.

Your credit score, a key component of your financial health, influences your ability to secure loans and the interest rates you'll get.

Minimum Credit Card payments

Making Credit Card minimum payments can extend the debt repayment period and accumulate a significant amount of interest over time. While it keeps your account in good standing, it does little to reduce the principal balance.

Paying more than the minimum, whenever possible, can significantly decrease the total interest paid and shorten the debt repayment timeline.

Conclusion

Effectively managing Credit Card debt is pivotal for financial health. It's about striking the right balance between leveraging the benefits and staying on top of repayments.

While you're on this path, using a Credit Card that offers benefits as you spend can be a smart strategy. With Axis Bank Credit Cards, the shopping experience is not just about spending but also about earning. Each purchase you make accumulates EDGE REWARDS points, which you can redeem across a diverse array of over 500 exciting rewards across various categories.

Axis Bank Credit Cards, therefore, offer a dual advantage — aiding in efficient debt management with their customer-centric features and making your spending rewarding. By integrating the EDGE REWARDS program into your financial strategy, you ensure that every transaction moves you closer to a debt-free life while simultaneously enjoying the perks of a rich rewards catalogue. This balance of prudent financial management and rewarding experiences is what sets Axis Bank Credit Cards apart as a wise choice for those journeying out of Credit Card debt.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.