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Sam Ghosh Founder and SEBI Regd. Investment Adviser at Wisejay Private Limited Bangalore, Karnataka
Should you take an offer to settle your credit card debt ?
In Debt Management
1 answer/comment
12:07:30 PM, 28th November, 2018
  • Sam GhoshFounder and SEBI Regd. Investment Adviser at Wisejay Private LimitedBangalore, Karnataka
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    This happens right? You are shopping and one person approaches you and gives you “free” credit card offer. You have never used a credit card, but having a credit option seems great. Now, you can buy the things you aspired and then pay off later. You are not limited by your salary. Also, they offered you cashback and other goodies. Yayyy! So, you go for more shopping.

    A few weeks later the credit card bill comes and you pay the minimum amount due because you do not have money to pay the whole amount. Also, who would pay the whole amount if you can get by paying the minimum, right? This goes on for six or so months and one fine morning you get a call from the credit card company for an amount you did not anticipate. Turns out paying the minimum amount due does not really save you from the exorbitant interest they charge. So, the interest compounded and now you have to pay an amount you do not have.

    Note: This is not a personal story. My own credit score is well above 800.


    Did you wonder how does the credit card company make money? Most of these companies offer “free” credit cards. They also offer many benefits plus forgo about one and a half month worth of interest if they had lent the money in some other form. So, why they are so interested in selling credit cards?

    It is about creating a bad habit of spending the money you do not have. The interest rates on credit cards after the grace period varies from 1.5% to 3% monthly . The rate depends on the type of card which depends on net worth and credit history of the person. Anyways, the annual interest rate of 1.5% to 3% monthly rate comes to 19.6% to 42.6% annually. So, if you miss any payment on credit card bill you are taking on a very very expensive loan. As the rates are higher for lower income individuals, they are more vulnerable to a credit trap.

    Credit cards also allow cash advance (cash withdrawal from an ATM using a credit card) of around 20% -40% of the credit limit. But, they are subjected to an advance fee of 2.5% to 3% of the withdrawal amount. The bigger issue is that cash advances do not have any grace period and they attract around the same high interest rate mentioned above. So, your interest clock starts at the point you used the credit card to withdraw cash.


    Now, let us come back to the problem we had. Consider the credit card companies offers you a settlement in which you have to pay only half the outstanding amount. Sweet deal, right ?

    The problem is that when you agreed to settle the credit card debt and pay a lower amount, it will appear on your credit score for a considerable time and lower your credit score. The effect on the credit score can be similar to a personal bankruptcy.

    Why does it matter? Because now you have to may higher interest rates for all the loans you take in the future – or worse the financial institutions may reject your loan applications for a long time. The few thousands “saved” through the credit card loan settlement may cost you not getting a loan for a house or a car for a long time. Even if you manage to get loans, you have to pay a higher interest rate. This can mean thousands of rupee more EMI per month payment for a considerable period.


    So, the best way to avoid the considerable hit on your credit score is to pay the outstanding amount in full. This may save you large amounts in the future. But, how to get the money?

    1. Sell some assets

    Look at your assets that you sell without harming your well being. We often carry stuff which we do not use. Yes, this may be painfull, but it is worth it.

    2. Take a loan from friends and family

    Reach out for help to your friends and family. After you clear the credit card debt- repay them with some interest.

    3. Take a debt consolidation loan

    Many financial institutions offer debt settlement loans to help you pay off other loans – say credit card loans. The interest rates are can be high because your credit rating got affected by the delayed payments. That is why we are keeping it as the last option.

    You do not have to choose one option. You can first arrange some cash selling assets, then get some help from family and friends and for anything remaining take a loan.

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