If you are having difficulty paying your credit card bills
or managing your debt, you could potentially end up paying a
much higher cost than what you owe to your financial institution.
Mismanagement of what you owe can lead to not just higher
interest rates, but a weak credit score, making your
existing loan and any future loans expensive in the long
run. A credit score is a three digit unique number ranging
from 300-900 based on a person's credit-worthiness that
licensed credit information companies such as Equifax draw
up after collecting information from lenders.
Here are some ways to manage your debt to keep costs of
borrowing down in the long-run.
Defaulting not only kicks in late fees and penalties, it
can attract a higher interest rate on your credit card. This
is usually buried in the fine print of your credit card
agreement. In addition, defaults will negatively impact your
credit report and score. Any new lenders can see all your
previous defaults on your credit report, and will price any
new loans accordingly. The credit report also reflects the
details about the settlement of default payments with your
Close any unused credit cards
Did you give in to a temptation to sign up for a store
credit card to get the extra discount promised by a
retailer? Unused cards can cost you in the long run. In
addition to any hidden fees, they are viewed as existing
debt and can potentially lower your credit score. Therefore,
keep only credit cards that you use frequently and manage
your payments regularly.
Good credit hygiene
Be realistic about what you can afford and don't max out
your monthly installments and credit card spends. Higher
credit utilisation impacts your credit score negatively. One
simple way to reduce your Equated Monthly Installment (EMI)
is to put more money down initially on your loan. This may
take some saving initially, but it will help to protect you
from monthly payments that are difficult to keep up. The
amount of loan that you take impacts your debt to income
ratio and your ability to get additional loans going forward.
Make timely payments
The most important aspect of keeping credit costs low is
having a track record reflecting that you pay your debts on
time -- EMIs, credit card bills or other lines of credit.
Even delays in credit card or EMI payments reflect poorly on
you overall credit, and kick in ugly late payment fees.
Limit your inquiries
Searching for new loans and credit cards indicates a
greater chance of increased levels of debt burden, thereby
negatively impacting your credit score. Instead of
transferring your credit liabilities from one card to next,
which can trigger multiple interest rates on several cards,
there are ways to consolidate your debt for lower interest rates.
Consolidate your debt
Debt consolidation is a process of combining several
unsecured loans e.g. credit card bills, medical bills,
personal loans etc — into one loan. This simple hack can
help you manage your debt, improve your credit score and
even lower your interest payments. Debt consolidation is one
of the critical financial planning tools if you are over-indebted.
Check your information
Regularly check that your credit bills and key
notifications are addressed to your current address, and
avoid chances of missing any payments. This will also enable
banks to submit your latest details to bureaus. With a few
simple checks and balances, you can stay on top of your debt
and maintain a healthy credit score in the long-run.
(Manu Sehgal is Business Development Leader, Emerging