Ways to avoid credit card debt

95 percent of credit card debt trap is because people get into impulsive purchases.

Gaurav Mashruwala

Certified Financial Planner

According to Certified Financial Planner, Gaurav Mashruwala, if you are getting into a situation where you are becoming an impulsive buyer, the ideal way is that you should not step out of the house with a credit card.

If you are already in debt, it would be ideal to liquidate your fixed deposits to pay off the credit card company. Another option is that most credit cards companies allow you to transfer your balance. You have outstanding on one credit card, the second company will let you transfer that balance at a lesser cost or take a personal loan.

Below is the verbatim transcript of the interview

Q: A lot of people these days have got trapped into high credit card debt. Ideally, how can these be avoided, and if people are already caught in the spiral then how do you get out of it?

A: About 95 percent of credit card debt trap is because people get into impulsive purchases. If you are getting into a situation where you are becoming an impulsive buyer, the ideal way is that you should not step out with a credit card. If there is still a need that you need to carry credit card then carry a shopping list so you stick to the list. If you are still not able to hold your emotions then try and pay by cash. What will happen is that the moment you have to shell out cash, you will be able to control your expenses to some extent.

If you are already in a situation where you are in a trap, which means you are revolving credit, cancel that card so that you don't build up more cash. After that, try and see if you have some assets, which you can liquidate. Liquidate your fixed deposits, if you have some balances, use that money to pay it off. Another option is that most of these credit cards companies allow you to transfer your balance. You have outstanding on one credit card, the second company will let you transfer that balance at a lesser cost or take a personal loan.

There are few options available which you can use to first minimize the outstanding, and then whatever is the outstanding, you can pay at a lesser cost.

Q: If I have any balance on my credit card, which is due to the credit card company how much money do I owe them? If I make a part payment, how much per cent am I suppose to pay them on the balance payment?

A: If you already have a debt, most credit card companies will let you pay back 5 percent of the total bill amount and the rest you can keep revolving over a period of time. It's not very prudent because that's what will eventually take you into that spiral. The question is how much will they charge. The rate of interest charged on credit card varies but it is anywhere between 3-3.5 percent per month.

So, the way it works is, for example, if in the month of January, you spend about Rs 10,000, at the end of the month, you get a bill for Rs 10,000. You decide to pay only Rs 1,000 then on Rs 9,000 the credit card company will charge you interest in the month of February.

Not only that, thereafter, whatever purchases you make in the month of February, interest will be charged from day one. That's the way the terms and conditions are the moment you get a credit card. Once you begin using it, it is deemed that you have accepted all the terms so be very careful. Once you decide to revolve credit, the cost of borrowing is phenomenal.