Posted by: Arti Bhargava on Jan 22, 2018, 06.30 AM IST
Jai has been a regular saver and holds bank deposits, bonds and mutual funds. During his recent wedding, he faced a flood of unexpected expenses. He had had no option but to use his credit cards to meet these expenses. He has not been able to clear his dues, since they are much more than what he can afford. He hopes to pay them off in small instalments, over the next 6-8 months, but is not sure if he will be able to use his credit cards sparingly until the old dues are paid. His investments are too precious for him to liquidate. What should Jai do to save himself from the mounting interest costs on his card spends?
Jai has crossed the first hurdle by recognising that he needs to do something about his credit card dues. Several spenders are unaware of the interest burden and end up repaying a large sum over a long period of time. Unpaid credit card dues are nothing but the costliest loan an individual can take.
Jai has three choices. First, he can request his credit card issuing bank to convert the dues into a personal loan. He will have to speak to the bank, find out the terms and complete the procedure if the bank is willing to enable such a conversion. He will then repay the loan in EMIs, at a lower interest cost. Second, he can take a personal loan from his bank, at a low cost, and repay the credit card outstanding in full. This option is feasible if his card is with one bank, and his accounts are with another. It serves the same purpose of reducing the interest burden.
"It does not make sense to have a deposit which returns 8% and keep a loan that costs 36%."
Third, he can take a loan against his deposits or investments from his bank and repay the credit card dues. Loan against an asset comes at a much lower cost and can also be repaid in installments, without selling off the asset.