Credit Card Debt Trap: Three Solutions Including Talking To Your Lender

"The number you have called is currently unavailable. Please try again later." Rahul (name changed) had heard this polite voice recording on the phone for the fifteenth time in a row.

He was frantic and experiencing a sinking feeling of helplessness.

"This guy was supposed to pay me back! And now, I'm left with a 24-lakh debt instead?!" he thought. His family and friends had already gotten calls from the recovery agents that had been getting more insistent every time they came calling.

Wondering how Rahul got to this point?

Life was good when Rahul had an Rs 8-lakh credit limit, spread across three cards. That was, until someone defrauded him and convinced him to buy insurance on his credit card.

The deal was that Rahul simply needed to purchase the insurance and then quickly cancel. The fraudster promised that he would split the commission after the cancellation. Rahul maxed out his credit limit, swiping his card for Rs 8 lakh worth of insurance policies.

The fraudster presumably got his commission. And then, vanished.

When he was unable to pay his credit card bills, the debt snowballed into Rs 24 lakh within months. This debt was impossible to clear and even attempts to repay a portion were useless because of the high interest rate.

This incident made Rahul seek help from Parijat Garg, a credit scoring consultant.

Incidents of credit card debt, like Rahul's, happen a lot more than one would think, Garg told NDTV Profit.

You may say this wouldn't happen to you because you would not be convinced so easily.

And that may be the case. But it doesn't take a fraud to push a credit card user into a debt trap. Here's what you need to know.

Don't Just Pay The Minimum Due

If one is struggling to pay the full amount that was used, then paying the minimum due and carrying the rest over to the next month is an option.

Here, a person can pay 5% of the amount used and then carry over the outstanding to the next month, with interest.

“If you pay the minimum dues, then you will not be treated as delinquent,” said Vijay Jasuja, former chief executive officer of SBI Cards & Payment Services Ltd.

But, while a default can be avoided this way, it's not the ideal path to take.

Making this payment will keep credit card dues standard, but the outstanding amount will be charged a hefty interest on a monthly basis.

This method will buy more time to make the payment, but the interest will add on to the outstanding amount.

Here's How It Works

Your credit card limit is Rs 1,00,000. You used Rs 50,000 to buy a phone. Due to a medical emergency in the same month, you resort to paying the minimum due.

It starts with the Rs 2,500, which is 5% of the Rs 50,000 due. Then a 3% of the whole amount due (Rs 50,000) which comes to Rs 1,500. A late fee of Rs 100 is also applied.

This will approximately add up to a minimum due of Rs 4,100 which is paid. But, it does not end here because the total outstanding amount for the Rs 50,000 due, is approximately Rs 47,400.

This is because a 3% monthly interest on the total due—Rs 1,500—is added to this. If carried on to the next month, then the interest and the outstanding amount will increase. This cycle progressively increases the debt.

Use Fire To Fight Fire

One of the only feasible ways to get rid of stubborn credit card debt is to take on more debt.

“You can go to any lender, and take a personal or secured loan,” said Jasuja.

The introduction of some fresh credit in the form of a personal loan can help the individual settle the outstanding amount. One can then pay back the second loan over a longer duration.

Usually, if there has not been a default, one should be able to get a personal loan, with an interest rate that is much lower than the charge on the credit card. The interest on credit card debt is the highest in the market.

One needs to compare the interest of loans available and take the one that offers the lowest interest rate, according to Harshvardhan Roongta, certified financial planner at Roongta Securities Pvt.

This loan can be backed up by insurance, mutual funds or fixed deposits, he said. Settling the credit card bill dues immediately prevents interest from piling up.

Converting Into EMI

“If your risk profile with the credit card issuer is good, you can convert the unpaid dues to EMI, with an interest,” said Jasuja.

However, this option is not available to all.

This can only be done if the lender is convinced of a person's capacity to pay back if granted more time. The bank usually conducts an analysis to assess the individual's income, type of employment, credit score and other relevant history to decide whether to offer this option.

These elements will help the bank decide a person's eligibility to avail the monthly instalment option.

Conversation With The Lender

If one cannot take a new loan, or is unable to pay off all the debt, a conversation with the lender might help.

For instance, if a person has the principal payment ready but cannot pay the interest, then they can check with the bank if they will allow any concessions on interest.

"The bank will also be open to this for larger amounts as they are not looking for bad debts," said Roongta. Exploring the concessions available or possibilities of one-time-settlements can also be discussed with the bank.