Credit Cards enjoy immense popularity amongst the users and are regarded as a stepping stone towards building a credit history. Not only do they offer ease of payment but also act as an instant loan to meet your financial emergencies. Usage of Credit Cards also helps you earn great rewards and cashback that result in saving you a lot of money. Most cards come with an interest-free period, up to 60 days depending on the issuer, during which you need not pay any interest on the money utilised.
But due to the high rate of interest charged by the banks, Credit Cards can turn into a financial nightmare. They are one of the most controversial financial products of all time. Although they are touted as the initiator of the era of plastic money, Credit Cards can push the users into a debt trap (if not used judiciously) that is difficult to get out of. Managing a card requires strict financial discipline on your part otherwise it can so go out of control and it would be difficult for you to rein it in.
What Leads a Credit Card Debt?
Credit Card debt is very easy to pile on but equally challenging to get rid of. Here are a few factors that contribute to you being burdened under a mountain of Credit Card debt:
- Not paying the entire amount due in a bill and only making a payment towards the minimum amount due.
- Unrestricted use of cards for making payment against even minor purchases.
- Using up the entire limit of the card in a short span, which you cannot afford to pay out with your limited income.
- Using multiple cards and not keeping track of their usage.
- Using a card to withdraw cash.
These are just a few of the major reasons that lead to building up of a Credit Card debt. Now when due to your financial mismanagement you are struggling under the burden of debt, one day you receive a call from your card issuer and they offer you to settle your account by paying just 40% of the entire amount due. Sounds tempting, doesn’t it? But read further before you accept this settlement offer.
Points to Consider When Settling Your Unpaid Credit Card Bills
The settlement offers are provided by your card issuers to bring their accounts receivables under control. They offer settlement for those accounts which they do not wish to continue. You must consider the following points before you accept any settlement offer:
- Impact on Your Credit Score
Going for a settlement offer on a Credit Card would literally destroy your credit score and would render you ineligible for any loans in the near future. Consider this option only if you are too desperate to get rid of the Credit Card debt and do not need any loan in the near future. It is better that rather than going for settlement, you use the money you have to pay a major portion of the debt and then continue making as much payment as you can afford every month. This will help you reduce your debt burden and would also not have any adverse impact on your credit score.
- Future Cash Expectations
If you think that your current cash crisis is a temporary situation only and you expect to receive a considerable sum of money in the near future that can be used towards payment of your Credit Card dues, then you should wait for that money to come and then make the payment for card bill. There is no use of settling the account if the situation can be handled easily in a matter of few days.
- Consider a Personal Loan
Rather than going for a Credit Card settlement or continue paying high interests on a card (up to 42% p.a.), you can Apply for a Personal Loan to repay your Credit Card dues. PersonalLoans have significantly lower interest rates (approx. 14-18%) and can be easily repaid in EMIs (Equated Monthly Instalments), without affecting your credit score adversely.
- Use Your Savings Balance
If you have money in your savings account or locked in a fixed deposit, it is better to use that money to pay your Credit Card dues. You will only be earning interest up to 8% on that balance whereas you are paying 42% on your Credit Card debt. So, it makes no sense keeping that money parked safely while you are feeling the pressure of your debt.
- Consolidate Your Debt
If you are running multiple high-interest loans and Credit Cards, it means a large portion of your monthly income is going towards interest payment. You should consider consolidating all your loans and cards into a single loan. This will significantly reduce your interest burden and would also help you in managing your debts conveniently.
Going for a Credit Card settlement could be the worst financial decision that you can ever make. So, rather than accepting this too good to be true offer, exercise some financial discipline and try to repay the card dues in full, as soon as possible.
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