How Can Credit Card Debts Prove Risky

Though India has been a cash economy largely, the period of demonetization has had more and more people opting for card usage, credit cards being one among them.  

While the utility of credit cards has been proven time and again, it is very easy for someone to use a credit card recklessly and land up in unsavory conditions. Credit card usage can become more expensive than you think when you continuously pay the minimum due amount or default on the bills. Eventually, it could carry the highest rate of interest when compared to other credit instruments.   

Additinoal Reading: Five Habits Highly Effective Credit Card Users Have in Common

Let us use a real-life example to see how a Credit card debt can prove to be risky. 

A Mumbai based software professional Rakesh Acharya used his credit card to fund purchases for his new house. He spent Rs 82000 on his card during the month of May 2018. He expected a joining bonus from his new company which would be good enough to clear this bill. Unfortunately, due to unforeseen circumstances, that did not materialize, and Rakesh ended up with a cred`it card bill of Rs 82000, which he had no means to clear. His bill looked like something like this 

The due date for his card bill is 10 June and the interest charged is 3.10% per month 

He managed to fund about Rs30,000 after borrowing from his friends, which he paid into the credit card account on 20 June. Let us see how the interest and other charges stack up against him and what is the amount that stands due on 20 June 

* Varies according to the outstanding amount 

Look at how huge interest amounts that are charged right from the day of purchase has added up an amount of close to Rs 4000 in little more than a month. Even now Rakesh has cleared his debt in full. He spoke to his lenders and agreed to pay in Rs 10,000 every month against this debt.  

Additinoal Reading: Understanding Your Credit Utilization Rate and How to Improve It

At this rate, he would take 9 months to clear off the entire debt at the end of which he would have paid Rs 10056 just in interest to clear off his original outstanding of Rs 97,000.  

Other side effects of a credit card debt: 

Restricts the further use of the card:  Till the time the amount is paid off in full, any further purchases continue to be charged interest, rendering the card practically useless.  

Big hit on credit score: Anytime you don’t pay an outstanding credit card bill, the same is reported to the credit bureau by your lender. This pulls down your credit score and the same remains low till you make full payment into your account. Remember it takes a long time even after you have repaid the entire amount for your score to come up. In this interim period, it would be difficult for you to avail any other kind of credit.  

Credit card debts are extremely risky and erodes the financial stability of the individuals bearing it. Therefore we would always advise you to spend well within your limit and clear off the outstanding in full at the end of every billing cycle.