It’s festival time and the deals being splashed on TV, internet, billboards and newspapers tend to appear twice as appealing due to the festive season ads. Be it your dream car or the expensive camera that you have been eyeing for the longest time, or the latest smartphone that costs as much a kidney on the grey market, the deals are all there.
Don’t have the money? The sellers tell you to reach for the plastic card that gives you a loan for about a month. But here’s a small warning if you are rushing towards loading on more debt than you already have: reckless spends on the card lead you to what is loosely called a ‘debt-trap’.
You are in a debt trap when your monthly income is not enough to cover your expenses plus the equated monthly instalment (EMI) on your loan and credit card debt.
Easy access to credit and a marketplace full of things that promise you happiness (if you buy that new TV or wear this new brand of shades) are only two of the reasons that lead some people into a debt trap.
Why does it happen?
Debt traps caused by credit card overspend happen because the ‘minimum due’ each month. You look at your bill of Rs1 lakh. Don’t have the money, and then you see the line that says you can just pay Rs5,000 (5% of Rs1 lakh).
That much you can manage. And you make that minimum payment. What you don’t realise is that you just took a very, let us repeat that, very expensive loan. Why, it’s just 2-3% interest rate, you argue. What you don’t realise is that is just the monthly rate.
The industry average of annual interest rate on credit cards stands at 40.80% per annum. Remember your home loan, on which you bargained so much? It costs you an average of 9.5%. If you simply pay just the minimum on a Rs1 lakh credit card bill, you will end up paying Rs222,602 over a 5-year period at a rate of 3% per month.
What should you do
You know you are in trouble if you begin to rotate your credit card debt between cards. You know you are in trouble when you begin to wake up from the stress of not having the money to pay off your debts.
You know you are in trouble when newspaper reports of a suicide due to debts makes you begin to panic. Use the panic monster to do a hard talk with yourself.
If you are in this trap, cut down on anything other than basic survival spends and start a programme to pay back your debt. Break your fixed deposits and other savings to pay back as much of your credit card debt as you can.
Then begin a savings programme to start paying back the rest of the card outstandings. And yes, no more festive spending this season. Stroll in the mall, that’s free.