Escaping the Credit Card Debt Trap
Credit cards are powerful tools for convenience and rewards, but they carry the highest interest rates of any standard loan product. In India, credit card Interest rates (APR) typically range from 36% to 42% per annum. This means if you carry a balance, your debt grows incredibly fast.
How Interest (Finance Charges) Works
Unlike home loans where interest is calculated monthly, credit card interest is calculated on a daily basis on the outstanding balance. If you only pay the "Minimum Amount Due" (usually 5% of total), you are essentially only paying the interest component, leaving the principal untouched. This is how people get stuck in debt for years.
Strategies to Pay Off Debt Faster
- Snowball Method: List your debts from smallest to largest. Pay minimums on all, but throw extra money at the smallest balance. The psychological win of clearing one card motivaties you to tackle the next.
- Avalanche Method: List debts by Interest Rate (High to Low). Pay off the card with the highest APR (e.g., 42%) first. This mathematically saves you the most money.
- Balance Transfer: Move your debt to a new card offering a low-interest or 0% interest period (rare in India, but lower rate personal loans can be used to consolidate).
The Danger of Minimum Payments
Paying only the minimum due is a trap designed by banks. For a balance of ₹1 Lakh at 36% APR:
- Min Payment (₹5,000): It could take over 10 years to pay off, and you'd pay lakhs in interest.
- Fixed Payment (₹10,000): You could clear the debt in just under a year.
Using This Calculator
This tool helps you plan your exit. Enter your current total balance and the interest rate (check your monthly statement, usually 3-3.6% per month). Adjust the "Planned Monthly Payment" slider to see how increasing your payment by just ₹1,000 or ₹2,000 can shave months or years off your debt freedom date.
FAQs
- Does paying off credit card debt improve CIBIL?
- Yes, significantly. Managing credit utilization ratio (<30%) is a major factor in improving your credit score.
- Should I close the card after paying off?
- Not necessarily. Keeping it open (with zero balance) increases your total available credit limit, which helps your Utilization Ratio. Just stop using it if you lack discipline.