Are you in a debt-trap?

Twenty-four-year old Dhrub Bose (name changed on request) was just out of his hotel management college when a smooth-talking credit card age...

Twenty-four-year old Dhrub Bose (name changed on request) was just out of his hotel management college when a smooth-talking credit card agent handed him his first piece of plastic, and Dhrub’s life knew no bounds. “It was almost like I had got a magic wand, I could just about get anything I wanted,” remembers Bose.

But this little wand carried a hidden sting. It struck two years later, when his personal bottom line was awash in red with a Rs 50,000 credit card debt. And limited means to pay. “By now I was working in a call centre, earning about Rs 11,000 per month. After paying my rent, electricity and food bills I would hardly have enough money to pay the credit card bill. With a debt of half a lakh, I had a recovery agent knocking at my door everyday,” he says.

What Bose, and thousands of people like him, do not realise is that the credit card is a personal loan, that unless paid off in time snowballs into a personal net worth bomb. “The first thing I did was destroy the card, borrow money from parents and payoff the entire amount,” a chastened Bose admits today.

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The shopping aid that carries a sting
The problem starts innocently enough, with most people using cards sparingly. It begins to get out of the box when the card is used to buy without having the money in the bank for it. Then the late payment fees begin and the interest bomb is detonated. Even now, if the card holder reigns in spending, she has a chance to return to safe ground. The debt bomb explodes when several cards are used to build up debt, with no payoff in sight and several cards are used to build up debt.

Bose is lucky that his parents paid off, but the number of people paying off their credit card loans by taking personal loans is rising. The problem is compounded by the usurious interest rates charged by the credit card companies. We in India pay some of the highest interest rates in the world. At 2.95 per cent per month, the annual interest cost works out to a huge 36 per cent! Similar rates in the US are just between 2.9 per cent to 20 per cent annually, depending upon the credit rating of the individuals.

In the absence of an efficient credit rating system in India, everybody ends up paying the same rate and these are higher because of the legal system and recovery problems. Says Puneet Chaddha, Senior Vice-President and Head of Cards, HSBC, “the card interest rate is higher in India because of the lack of security, high delinquencies, low spends, higher processing cost, fraud losses and the prevailing legal system.”

Hear the warning bells

30 to 35 per cent of credit card holders in India, making up 80 per cent of the transaction value, roll over their debt

Nobody can live without plastic today. It is an efficient way to carry money. But it is a doubled edged weapon that can backfire. How can you know if your credit card spend is getting out of line? Here are a few key symptoms that you can check on. Next time you are out shopping, check out how many times you reach out for your credit card. Over a six month period, see how many times you just pay the minimum amount thinking that you will avoid the 2.95 per cent interest. And finally, at the end of your financial year, calculate the total amount of spend routed through the card and compare it with the money that you have paid as interest. If you are rolling forward your debt for more than two months you have a problem at hand. If you don’t watch out, the goon will soon be knocking at your door.

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How to get out of credit card debt
To get out of debt is a three step process. First. Stop making fresh purchases on your card. Till you have paid off the entire amount, do not use the card again. Two, consolidate your debt. Get all yours bills together and write down the total payments that you have to make against each card. Write down the due dates and to start with, pay off the ones that have the minimum amount due. Use your savings instead of a loan if possible. Bring the outstanding down to zero and the moment you do that, either ask your bank for a card with lower credit limit or simply destroy the extra cards. One is good enough to take care of all your needs. Three, if you don’t have personal savings, try and get personal loans, family, friends, colleagues or whoever at zero interest to pay off your debt. If this is not possible, try and get a cheaper rate to get rid of this expensive debt bomb in your balance sheet.

In the absence of a robust individual bankruptcy law in India, you have to manage your credit card debt yourself. Now is a good time to begin doing that.