Eliminate Credit card debt

A poor credit history can make it harder for you to rent an apartment, buy a car, or fulfill a dream. It is important to know how credit can change your spending power and how you can recognize the danger signs of credit and avoid serious problems.

The problem arises when people tend to use their credit card for almost every expenditure from grocery, accessories, entertainment to children's toys. Soon they find themselves facing a severe cash crunch, unable to pay back their card dues, and forced to borrow from friends and relatives.

There are several people out there who use their card like there's no financial tomorrow. Don't forget that as soon as you roll the bill over, the interest clock starts to tick.

Warning signs

Your card does not give you credit for free. And once you allow the outstandings to pile up, the sum can pose as much danger to your financial security. It's the same old addiction thing. You can get as addicted to irresponsible spending as you can to drugs or alcohol.

So, first admit that there's a problem. The symptoms are easy enough to detect: huge credit card statements, plenty of unused clothing and gizmos, a wallet full of ATM receipts and charge slips and, the worst, a savings bank account with no savings.

Credit cards can reduce your future buying power if you carry a balance and let finance charges build up.

You are in trouble if:

• You reach for your card automatically when you don't have cash.
• The monthly statement you receive has several expenses you could have avoided.
• You pay just the minimum due on your credit cards each month.
• You use the cash advances facility regularly, often to pay off other debts.

• You use one credit card to pay off the bills on another card.

If one or more of the above apply to you, you are headed for serious trouble. Still not convinced? Calculate the sums you paid over the years in credit dues, interest and late payment fees: they will add up to a fortune.

How can you get rid of your credit card debt?

Financial freedom can be yours if you exercise some willpower and take a few basic steps to eliminate debt.

• The first thing to do is get all your credit card bills together. For each account, write down the total balance and the minimum monthly payment required. Prioritize your repayment.

• The next step is to be sure you can make the minimum payments on your credit cards. Look at your spending and make cuts where you can to find the money to pay your credit card bills.

• Call the bank today and ask for a lower credit limit. Once that's done, you won't be able to charge as much on your card, and will be forced to use it only when absolutely necessary.

• If you have already used your card to the hilt, keep lowering the limit as and when you pay off the balance. Also if your interest liabilities are huge, consider transferring your balance to a low-interest card. The difference of even half a basis point in interest can save you a few thousand rupees in payments.

• Make it a priority to pay off your credit card bills. If need be, use your savings to bring your outstandings to zero. Once you eliminate the debt, make sure you pay your card dues in total each month.

• Don't put off settling your dues for another day. The more you delay, the more the bills will mount. 'Decide How Many Credit Cards You Need' and 'Decide How Much Credit Is Too Much.' Choose strategies to cut your debts as soon as possible.

• Pay off cards with the smallest balances first. Paying off cards with small balances gives you extra money to pay on the bigger balances. Once you pay off a bill, next month add the amount you have been paying to the check you write to your remaining creditors.

For example, let's say you pay Rs 350 a month on your Citibank account. Once it's paid off you can start adding Rs 650 to the check you write to pay your ICICI account. Then when you've paid off your VISA, add that amount, including the Rs 350 from the Citibank account, to the check you write to pay your MasterCard account, and so on until all the accounts are paid in full.

• Stop making new charges. If you have to, cut up your cards, hide them, or lock them in a drawer. The key to sticking to your credit card debt repayment plan is to stay flexible.

• If you find that you set unrealistic spending limits in the beginning, revise your spending plan the next month. Find one or two low-rate cards and cancel all the others. Switching from a high-rate credit card to a low-rate card can easily save you Rs 20,000 or more a year.

• Carry just what you need. Most people need only one or two credit cards one for purchases they pay off each month, and another for emergencies (or business purposes). Any more than that is usually overkill.

• Get some free stuff. If you're going to use it anyways, why not get something back for your trouble? If you consolidate your spending on one card, consider getting a 'rewards' card where you earn miles, stuff, or cash back on your spending. Look for a card that will award you stuff you'll actually use.

• Cash is usually a good option. Still, don't let your spending get out of control just so you can get a free travel bag or a few extra airline miles.

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