How Can You Get Out of a Credit Card Debt Trap During this 3-month Moratorium Period?
Last Updated : March 30, 2020, 11:40 a.m.
The Reserve Bank of India (RBI) on March 27, 2020, has directed all the Banks and Non-banking Financial Companies (NBFCs) to provide the moratorium period of 3 months to individuals on all their retail loan payments. This measure was taken by the RBI to help individuals affected by the financial stress due to the ongoing Corona epidemic. During this moratorium period, lenders will not deduct the EMI from your account for any type of term loans such as personal loans , home loans, auto loans, and even your credit card dues. The entire tenure of the loan will shift by three months. This measure has emerged as quite a relief for common people who were worried about how they will make the repayments for different loans.
In this article, we will tell you how this recently announced measure by RBI can be a blessing in disguise for people having multiple loans and also credit cards and how they can come out of the debt trap. If you have multiple loans like a personal loan or home loan and with these, you also use a credit card, then this period of 3 months can be a golden chance for you to reduce the debt burden on you. Read on to know more!
What is the Credit Card Debt Trap and Why Is it Important to Get Out of it ASAP?
Let’s know about this debt trap first! When you opt to pay the ‘minimum amount due’ on your credit card (which is generally 5% to 10% of your total credit card bill), the total outstanding amount gets lesser but the interest keeps getting charged on the outstanding amount, that too each day. The interest can be as much as 30%-40% a year. So, when you decide to pay any amount lesser than the total outstanding amount, the unpaid amount attracts such revolving credit interest rate
If you make this a habit, there will come a day when even the minimum due amount will be out of your reach to pay, that’s why it is advised to pay the total outstanding amount. But you don’t need to worry as, after the recent RBI announcement, you can use this 3-month moratorium period to get out of this debt trap.
You must be asking how? Well, by opting for a moratorium period of three months, you won’t have to repay term loans for the upcoming 3 months. The money saved in this period could be used in paying all the outstanding amounts on your credit card. This smart utilization can help you in the long run.
Let’s understand through this an example.
Suppose that an individual has two existing loans on his name, a home loan, and a personal loan. Besides this, he also has a credit card on his name on which he has an outstanding balance amount of approximately INR 1.5 lakh.
The home loan is of INR 28 lakhs for a period of 15 years at an interest rate of 9% per annum. With these details, he must be paying an EMI amount of INR 28,399.
Similarly, his personal loan is for the amount of INR 8 lakhs at an interest rate of 12% per annum for a period of 4 years. For this loan facility, he has been paying an EMI of INR 21,067. So in total, he has been paying a total amount of INR 49,466 every month. You can have a look at the below table to get a clearer understanding of it.
| Details | Amount |
|---|---|
| Home Loan EMI | INR 28,399 |
| Personal Loan EMI | INR 21,067 |
| Total Credit Card Dues | INR 1, 50,000 |
| Total EMI that you can save during this 3-month Moratorium Period | INR 49,466 * 3 = INR 1,48,398 |
| Extra Amount Payable | INR 1,602 (1,50,000-148,398) |
The extra amount shown in the table is modest which you can easily do. If he decided to opt for a moratorium period of 3 months provided by his lenders, then he won’t have to pay any kind of EMI on his loans for the upcoming months. So by this, he could save a total amount of INR 1,48,398 which is a substantial amount. So, with this amount, he could easily pay off his credit card dues and start fresh! This is how he can get himself free from the huge debt in the next three months in a fast way.
How Utilizing your EMIs for Credit Card Payments will Increase your Credit Score?
RBI has clearly mentioned in the announcement that for the next three months, there will be no down gradation in your credit score if you opt for the moratorium period for all the term loans. The lenders will not report this as a non-repayment to any of the credit rating agencies for any of the individuals or businesses.
If you have a poor credit score and were finding ways to increase your credit score, then this is a chance for you to get it right! By clearing your credit card dues by utilizing the EMI outgo on multiple loans, you can increase your credit score.
Plus, you will be out of the debt trap you were in before. Once this 3-month moratorium period expires, you can start afresh and control your credit card spendings in a way that you can pay the card dues along with multiple loan EMI obligations.
