How to Avoid Moratorium & Make Part Payment for Outstanding Credit Card Dues?
Will RBI extend Moratorium for another 3 months or not? This is a buzz word everywhere.
For many borrowers another grant for deferring EMIs after August 2020 may come as a sweet surprise (if happens); however the fact of the matter is, you must consider servicing your Credit Card dues, partly if not fully, irrespective of RBI’s decision to extend or not extend the Covid Relief Moratorium. Beyond six months, moratorium would be far from a financial breather for your debts.
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There is an interest cost of missing EMIs and thus it is recommended to service your high interest rate dues such as Credit Card bills and Personal Loan EMIs as far as possible. EMI Holiday should be only opted as a last resort to ease the cash flows.
Paying Out Credit Card Outstanding
Do you know your Credit Card offers you maximum repayment flexibility? Unlike Personal Loans or other loan products, you can make part payment on your Credit Card outstanding as and when you want prior the next billing cycle, without any charge or penalty.
You can make payments for Credit Cards in any of the following ways:
Pay out full balance.
You can pay the total outstanding as shown in the monthly Card Statement. Paying full amount prior the due date makes you enjoy 45-55 days of free interest credit.
Pay the minimum due amount.
With every Credit Card you get flexibility to roll over the outstanding balance to next month by repaying the only minimum due which is usually up to 5 % of the total due. This feature lets you keep your card active but interest begins to accrue on the balance amount.
The moment your credit card balance is rolled over, you lose the benefit of free credit on your card.
Make partial payments as per your cash flows.
You can repay part of outstanding amount as per the cash flows. . It is always recommended to pay out the balance as much as you can, rather than just sticking with minimum due payment. This helps you minimise the interest burden as and when you have adequate cash in hand.
Opt for Credit Card EMIs
Instead of rolling over your Credit Card debt and servicing 2-3% interest each month, it is recommended to convert your outstanding amount into a structured option and opt for EMI payments. You can convert your Credit Card dues into 3 months, 6 months, or 9 months EMIs. The rate of interest is much lower and you also get to distribute the liability evenly into monthly payments. For instance, easy EMI facility is available on all SBI Credit Cards.
Part Payment vs. Moratorium
It is always recommended to pay out your Credit Card balance as far as possible. Moratorium is not advisable for credit card dues. For, your credit outstanding is charged at 2.4 – 4.2% interest per month. The rates vary across the products and card providers. For example: HDFC Credit Cards are available for 1.99% to 3.4% per month.
Let’s understand the impact of Moratorium on the Credit Card dues.
Say, a Credit Card with credit limit of 1 Lakhs has an outstanding balance of Rs 30,000. It is put on Moratorium for 6 months. The rate of interest is 3.4% per month. The outstanding at the end of 6 months will be: Rs 36711 on the same amount.
However, in case you continue to use your Credit Card during the moratorium and keep building outstanding of Rs 5000 each month, the total outstanding balance will inflate to Rs 70000 after six months. Thus after the moratorium, Minimum Amount due will stand at Rs 3500 and interest cost will be around Rs 2500. Thus, missing full payment after moratorium will be too pricey for you.
On the other hand if you choose to prepay partly say Rs 15000 each month & also spending Rs 5000 each month, you will be able to repay the balance after the end of three months. In case you pay Rs 10000 partly and continue adding Rs 5000 balance, you will take four months to pay out your dues.
By consistently prepaying some part of your debt, your monthly outstanding will reduce each month, and interest cost will also be much less than in case of Moratorium.
Thus we can see that part paying the Credit Card Outstanding is better than rolling over the balance or putting out dues on Moratorium.
Amid financial disruptions caused due to COVID 19, if you have outstanding on multiple cards and loan accounts, it could be a little tricky to pay out balance. So let’s look at some of the ways to manage your dues efficiently.
Credit Card Part Payment Methods
1. Pay highest interest rate first.
When you have multiple credit accounts to service each month, it is a good strategy to pay out the most expensive one first. Thus, you will get rid of the most expensive debt. Make sure you do not use this card, till you are able reduce the overall outstanding amount.
2. Clear lowest balance.
Another smart option is to clear the total outstanding of the Credit Card with lowest balance. This is called snowball method. It helps to quickly reduce the number of debt accounts and thus also acts as an effective motivation for paying out debt,
3. Do away with card you were procrastinating to cancel.
As important it is to repay the accumulated debt as is to practice a financial discipline. By deciding to close the Credit Card which you no longer want to use you can certainly keep a check on your monthly spends.
4. Consolidate the accounts.
One of the efficient ways to manage your debt is by consolidating all accounts into one. This will help you reduce the overall monthly repayment burden and make debt manageable as well.
5. Opt for structured EMIs.
By choosing an EMI facility on your Credit Card, you can considerably lower your interest cost. The total outstanding will be spread out into equal instalments. This makes the debt affordable and also cuts down the constant fear of mounting interest or defaulting the payment.
6. Get balance transfer card.
In order to get rid of your Credit Card outstanding you can apply for balance transfer card. You can find as attractive deals as 0% interest rate on transfer. The offer is however available for limited period such as up to 12 months. Thus balance transfer card is one of the affordable & efficient ways to pay out Credit Card outstanding. You can also apply for EMIs while transferring the balance.
Full payment of credit card balance is always better than partial payments. When you do not pay out in full, the interest will be applicable on the remaining balance. According to CIBIL’s new algorithm, missing or making late Credit Card payments can impact your Credit Score considerably. Thus it is always recommended to ensure that your Credit Card balance is manageable ever.
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