What’s an ideal credit repayment strategy? Can lender negotiation reduce debt?

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Even though credit cards are similar to personal loans – both are unsecured loans – the interest levied on the former is much higher compared to any personal loan. The freedom provided to credit cardholders in accessing the sanctioned credit limit increases the credit risk for card issuers. Thus, companies usually compensate the risk by charging higher interest rates from customers. But considering the unassumingly high rates, one may want to reduce and eliminate this credit debt as soon as possible. How to go about it?

Paying off credit card debt requires a hands-on approach. Right from determining a good repayment strategy to contacting lenders for negotiating interest rates – you must be an intelligent borrower to be able to rub off credit debts on time.

Ideal credit repayment strategy for you?

The ideal repayment strategy should begin before borrowing. It is best to plan in advance as to how you will repay your debts in a timely manner. This will not just help you stay on track with your repayments, it will also stop you from borrowing more than what you can comfortably repay without stretching yourself.

“If your debts are small, then just be diligent about repayment, and you will be fine. You can also look to prepay them if there are no financial penalties for doing so. If you have multiple debts piled up despite your best efforts, then your first step must be to do a proper accounting of how much you owe, to whom, and at what interest. Once you have done that, figure out the most expensive debts. Typically, these would be your credit card debts followed by personal loans. Your first step should be to pay these off,” said Adhil Shetty, CEO at BankBazaar.com.

Should you break high-return investments to pay off credit?

Consider breaking your low-returns investments such as FDs to repay these. You are paying close to 40% per year on your credit card dues compared to the 5-7% interest you earn on your FDs. So it would be wiser to clear off your credit card outstanding using your FDs and then put money away for emergencies. Do not break long-term or high-return investments such as mutual funds for this purpose.

If you have no way of closing them, Shetty suggests, ” Look to restructure your debts so that you have easier repayment terms. For instance, instead of paying only a part of your credit card dues, convert them to an EMI on call so that you do not have to incur any penalties and you and up repaying the amount at a cost lower than the monthly interest. You can also consider taking up a debt consolidation loan, however, make sure you understand exactly how it works and read all the terms and conditions before you go ahead with it.”

If you have multiple liabilities and are unclear about prioritising them in the best possible way, it would be wise to take professional help to get out of the debt trap.

Role of debt consolidation?

Debt consolidation allows you to combine multiple small debts into one loan. This may also come with more favourable repayment terms such as lower interest rates and affordable EMIs. It also you to keep a tab on your overall debts efficiently and simplifies your repayment process as there are fewer payments to track and repay.

However, Shetty states, “Debt consolidation loans have their own caveats. Since debt consolidation is primarily used to consolidate expensive unsecured debt, the new loan may be of higher value and the lender may require collateral as security to approve the loan. Debt consolidation loans can also be restrictive. They usually come with a debt agreement which stipulates that the loan amount can be used only to repay existing loans and that the loans would be closed within a fixed period, without delays.”

Moreover, it may also restrict you from borrowing further during the consolidation period. In a way, this is good as it’ll prevent you from spiralling into a debt trap. On the flip side, you may no longer be able to borrow even in case of emergencies so long as the debt consolidation loan is running.

Can negotiation with lenders reduce credit debt?

“While negotiation may not help you reduce the amount you need to pay back, you may be able to get other concessions such as a longer tenor or easier repayment options. Bear in mind that if your loan is not paid in full but is recorded as “settled” instead of “closed” in your credit report, you may find it difficult to get credit in future,” Shetty explained.

Time to revisit your credit report? 

In a bid to reduce your credit debt, one should begin viewing their credit report and credit score more frequently. Both these can be extracted free of cost online. From these reports, try to identify the expenses that have constantly lowered your rating.

Besides, if you default on your payments or frequently apply for more credit, your credit score will take a beating. You will come across as credit-hungry and would be either denied further credit or be able to avail them at only very high costs. This can push you further into debt.