Not paying your credit card outstanding is inviting financial trouble. The money spent through a credit card is debt, and you need to repay it within the due date to avoid paying interest charges and penalties. Missing your card payments can lead to the suspension of the card account and damage your credit score. Additionally, dishonoring credit card payments can attract legal action. Often, people are lured by various offers such as cash back, reward points and discounts. These attractions could lead to overspending. Unchecked spending can lead to burgeoning debt, financial stress, missed payments and ultimately a default. It’s not uncommon for people to utilize their entire credit limit during a financial emergency. Some use the credit card for frivolous spending. Whatever the reason, the fact remains that failing to pay credit card bill on time can have a bearing on your personal finances.
WHAT IF YOU DON’T PAY YOUR CREDIT CARD OUTSTANDING?
Credit card companies usually give an interest-free credit period of up to 50 days. If you pay the card bill within this period, you don’t need to pay any interest charges or late payment penalties. However, if you don’t pay the outstanding amount within the due date, you are liable to pay late payment fees and interest charges.
If the outstanding amount crosses the credit limit allowed on the card, the card could get suspended. Other charges may be levied as per the terms and conditions applicable on the card. If you pay the minimum amount due on your card bill (usually 5% of the total outstanding amount), your card account will remain active and you can avoid paying the late payment fee as well. However, interest charges will be levied on the outstanding amount, which are quite high (around 36% to 42% annually). You should always try to clear the total outstanding amount within the due date to avoid the hefty interest charges. Once you fail to clear the credit card dues, you lose the benefit of interest-free credit period on the card until the outstanding is repaid in full.
Late payment or non-payment of credit card outstanding will directly impact your credit score. It may take time to restore the credit score back to the previous level but some damage could have been already caused. This will make it difficult for you to apply for another credit line in the future like a new credit card, a personal loan, a car loan or even a home loan. If you are unable to repay credit card dues, card companies start recovery with continuous reminders calls to clear the outstanding. They may even take legal recourse if the outstanding remains unpaid for several months. The legal procedure may take many years to conclude. You may no longer be able to get a loan from any bank as the credit card default will reflect in CIBIL credit score.
Before taking legal action, card companies usually offer a settlement option to the card holder, and they may ask for a fraction of the total outstanding to close the case. The card companies may provide repayment of the entire bill in two or three EMIs. Taking the settlement option reflects on your credit history.
IF YOU’RE STRUGGLING TO PAY YOUR CREDIT CARD BILL?
If you are not in a position to clear the entire dues, then you should at least clear the minimum due amount on time. Instead of paying high interest on the card, you may consider getting a personal loan or loan against security from the bank to repay the outstanding amount. You may want to transfer the balance to another card that charges less interest for a few months. Consider the following steps:
• In order to get a personal loan or a balance transfer, you’ll still need a good credit score which might have taken a beating if you’ve been irregular with your existing card payments
• The new card where you wish to transfer your balance needs to have a credit limit that can accommodate your existing debt
• Getting a personal loan or a transferring your balance doesn’t mean freedom from debt. Yes, you might be charged lesser in terms of interest payments for a few months, but the dues still need to be repaid in full in time. As such, evaluate your options closely before triggering such a move and go for it only if you think it’ll make a major difference to your debt-clearing actions. Most importantly, analyse the affordability of the repayments as a default is likely to worsen your debt situation.
You should ideally avoid opting for settlement of outstanding amount. Any settlement will reflect in your credit report and you may not be able to get a loan in the near future. If you are not able to arrange for funds through a loan or other sources to repay your credit card dues, you can request your credit card company to allow repayment in EMIs. Remember to repay your EMIs on time.
You might want to seek financial assistance from your friends or family to help clear the dues. You can also sell things gathering dust at your house to raise some cash in short notice. Lastly, you should consider increasing your income pool by trying to generate some money to accelerate the clearing of credit card dues. It’s a great payment tool that helps consumers to save more -- not spend more --with its meaningful benefits like cash back and redeemable reward points. But responsible borrowing lies at the heart of maximization of benefits. On the other hand, repaying your card outstanding on time will do a world of good to your credit score. (The author is CEO, BankBazaar.com)