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How to clear your credit

W ent on massive shopping spree lately?

Now it's time to reap what you have sown. And, if debt is what you have sown, you are in for a problem.

Don't worry, through, there's always a way out. If you play your cards right, you will be able to get out of debt sooner than expected.

Here are some tips on how to manage your credit card debt.

1. Stop using the card

Remember that American Express ad: Don't leave home without it?

Well, if you are revolving on your card, it's best you ignore that advice.

Revolving credit means that you don't pay your entire credit card bill. You pay just the minimum amount of 5% or 10% (or more); the remaining amount is added to your bill for the the following month.

You will be charged a rate of interest -- which will be somewhere between 2.5% to 2.75% per month -- on the amount you carry over. And -- here is the catch -- whatever fresh payments you make on your card will also be included.

So, if you owe the bank Rs 10,000 (which is being revolved), you will be charged interest on this amount. Now, if you go out for dinner and you pay for the bill on the card, this amount will also be added to Rs 10,000. Let's say it is now Rs 10,800. The rate of interest will be levied not just on Rs 10,000 but on Rs 10,800.

The only way out: Stop using your card.

How you get by? Use cash or another card till you clear your debt on this one.

2. Switch cards

Another bank will be more than happy to take you on, s o they will offer a balance transfer. This is what it means:

They pay the money you owe your bank on your card; in return, you take a card with them instead.

Let's say you have a credit card from ICICI Bank and you opt for a balance transfer from HDFC Bank. The latter will

pay off your bill of Rs 10,000 to ICICI Bank.

You now owe HDFC Bank Rs 10,000.

So what's the deal? The deal is that you pay HDFC a lower interest rate on this amount.

A balance transfer offers a lower interest rate for the first six months; it may drop to 1.25% - 1.75% for the first six months. Try your level best -- even if it means skimping and scrounging -- to pay back your debt during this time frame. Once you cross this period, the normal interest rate of 2.5% to 2.75% will be levied.

3. Take a personal loan

Have you ever had a bank call you and offer you a personal loan (they seem to do that a lot these days). If you work for a select list of companies, you will get the loan at a cheaper rate than what is available to others.

If the rate on your credit card is 2.5% to 2.75% per month, it will amount to 30% to 33% per annum. By this standard, a personal loan is cheaper.

It should be around 21% per annum or even less -- between 14% to 18% -- if you work for a select company.

Take this loan and pay back your card debt because paying back this loan will be much cheaper.

4. Ask for an EMI

Another alternative is to talk to your credit card company and ask them if they will reschedule your loan. Can they levy a rate of interest and break up the money you owe them (Rs 10,000 in our example) and the rate of interest into an Equated Monthly Installment?

This EMI will be a fixed amount that is paid every month for a fixed time frame till the entire loan is settled.

Of course, if none of the above appeals to you, you can ask your parents for an interest free loan to bail you out. If this option is strictly no-no, then you might at well tighten your belt and get ready to clear your debt ASAP.

Category: Credit

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