Sometimes, there is a medical or other financial emergency wherein you pay the amount with your credit card. But what if you don’t have the money to pay the outstanding amount when the monthly bill is generated? Should you convert it into a personal loan with EMIs that are easy on the pocket? Let us discuss.
Factors to consider for converting credit card outstanding into a personal loan
If you are unable to pay the minimum amount due outstanding on the credit card by the due date, it will be reported to the credit bureaus. It will hit your credit score adversely. A default will make it difficult to get new loans/credit cards in future. In such a situation, consider converting the credit card outstanding amount into a personal loan. Some of the factors to consider include the following.
Lower interest rate
The interest rate charged on credit card outstanding amounts is quite high. For example, HDFC Bank levies a finance charge of 3.75% per month or 45.00% per year on the outstanding amount for most of its credit cards. The exceptions are Infinia, Infinia Metal Edition, Diners Black Metal Edition, Diners Black, BizBlack Metal Card, and H.O.G Diners Club cards, where the finance charge is 1.99% per month or 23.88% per year.
Similarly, most banks charge a monthly interest rate in the 3.00% to 3.75% range or an annual interest rate in the 36.00% to 45.00% on the outstanding amount. It is a very high interest rate and can put you in a debt trap if you are not able to repay the entire outstanding amount quickly.
The interest rate charged on personal loans is lower than on credit cards. It differs from bank to bank and can be in the 10.00% to 20.00% per annum range. Hence, if you are unable to repay the credit card outstanding, consider converting it into a personal loan.
Besides levying finance charges (interest amount), banks also levy a late payment fee on the credit card outstanding amount. You can avoid this fee by converting the credit card outstanding into a personal loan.
Consolidation of multiple credit card debts into a single personal loan
If you have an outstanding amount on more than one credit card and are unable to pay, you can consolidate them all into a single personal loan. That way, you will not need to remember the multiple due dates on multiple credit cards. You will need to focus on paying just one EMI on the personal loan.
Flexibility to choose the loan tenure and EMI
While converting the credit card outstanding into a personal loan, you can choose the EMI amount depending on your monthly repayment capacity. Accordingly, you can select the personal loan tenure. Banks usually provide personal loans with a tenure ranging from 12 to 60 months. Choosing a lower EMI amount that is easy on the pocket gives you time to repay at your own pace with peace of mind.
Reduction in credit utilisation ratio
When you take a personal loan and use the amount to repay the credit card outstanding, it brings down the credit utilisation ratio of the credit card. Both; the outstanding balance repayment and lowering of the credit utilisation ratio contribute towards improving your credit score. Once the outstanding balance on your credit card is cleared, you can start using it again. However, make sure you use it only for essential spends so you don’t accumulate debt again.
Avoid receiving calls/visits from collection agents
No one likes receiving calls/visits from collection agents for recovery of credit card outstanding. The collection agents visiting your house when you are in the office to collect money from the family members can make them and you anxious. Also, collection agents visiting your office for recovery in front of your office colleagues can create an embarrassing situation.
When you convert the credit card outstanding into a personal loan, you can save yourself from receiving calls/visits from collection agents for recovery.
How to convert the credit card outstanding into a personal loan?
Once you decide to convert your credit card outstanding into a personal loan, you can start by doing research on it. You can visit a loans aggregator website or app to compare the offers from various banks. Consider factors like loan amount, interest rate, tenure, processing fee, flexibility, prepayment and foreclosure charges, any other charges, etc.
Finalise a couple of banks and visit them or call the bank executive to your place to discuss the personal loan details. During the meeting, discuss the loan eligibility criteria, documentation, timelines, interest rate and other details. The next step will be to fill out the application form and submit it along with the documents. If all the details provided are fine, the bank will approve the loan and credit the money to your bank account. You can use it to clear the credit card outstanding.
You can ask the bank to auto-debit the EMI amount from your savings account. Make sure you maintain one additional EMI amount in your savings account. It will be useful if you face financial difficulty in any month. Once you repay the personal loan, collect the No Dues Certificate from the bank.
Conversion of credit card outstanding into a personal loan has advantages
Credit cards are helpful when you need money in an emergency situation. However, if you are unable to pay the outstanding amount by the due date, the interest charges are exorbitant. Converting the outstanding amount into a personal loan has various advantages. It comes at a lower interest rate, provides a longer tenure to pay the amount in easy EMIs, etc. A personal loan with EMIs spread over a tenure helps in getting the financial situation in control, giving the much-needed peace of mind.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
