Credit cards provide the convenience of instant payments and delayed settlement, but this flexibility often comes with a steep price tag if you choose to revolve your credit balance. Many Indian consumers are unaware of the high costs that arise when they carry forward their unpaid credit card dues from month to month.

What Are Revolving Credit Card Dues?

Revolving credit allows you to carry over part of your unpaid balance to the next billing cycle, as long as you pay the minimum amount due. However, any unpaid amount accrues interest, which can turn manageable expenses into a long-term debt burden. This is particularly true when interest rates on revolving credit are high, as seen with most credit cards in India.

The Real Cost: Interest Rates

In India, credit card interest rates tend to be quite high. For example, HDFC Bank charges interest rates up to 3.6% per month, which amounts to 43.2% per annum. If you do not pay your total outstanding balance, the bank will start charging interest on the carried-forward amount.

To understand how this works, let's look at an example:

Imagine you have an outstanding balance of ₹1,00,000 on your HDFC credit card. At an interest rate of 3.6% per month, you would incur ₹3,600 in interest charges for just one month. If you continue to revolve this balance over several months without clearing it in full, the compounding interest will drastically increase the total cost of your original purchase.

Here's an illustration of the cost of repaying ₹1,00,000 over one year by revolving it.

The Minimum Payment Trap

Paying only the minimum due each month may seem like an easy way to manage expenses, but this can trap you in a cycle of debt. The minimum payment is often just 5% of your total balance. While this keeps your account active and prevents late fees, most of what you pay goes toward interest, barely touching the principal amount. Over time, this significantly extends the repayment period.

For instance, if you have ₹50,000 in dues and make a minimum payment of ₹2,500 each month, it will take years to pay off the balance while you continue to rack up interest on the unpaid portion. By the end of this repayment period, the total amount you end up paying could be double or more than the original balance.

Late Fees and Penalty Interest Rates

Missing even one credit card payment can result in additional costs. Banks charge hefty late fees and penalty interest rates, pushing the effective interest rate even higher than the standard monthly rate. For consumers struggling to keep up with payments, this can quickly turn into a financial nightmare.

The Impact on Your Credit Score

Carrying high credit card dues impacts your credit utilisation ratio, which is a key component of your credit score. A high balance relative to your credit limit can lower your credit score, making it harder and more expensive to obtain loans or credit in the future. Maintaining low balances or paying off dues in full each month is crucial for protecting your creditworthiness.

How to Escape Revolving Credit

If you find yourself caught in the trap of revolving credit card debt, here are some strategies to help you escape:

1. Pay More Than the Minimum Due: Always aim to pay more than the minimum amount due each month. The more you pay, the less interest you'll accumulate, and you'll clear your debt faster.
2. Consolidate Your Debt: Consider consolidating high-interest credit card debt into a loan with a lower interest rate.This is where Quicklend's Loan Against Mutual Fund makes for a terrific option. You have interest rates starting from as low as 10% which is four times lower than credit card interest rates. What's more you can repay the principal amount at your convenience without having to worry about hefty interest rates.
3. Opt for EMI Conversions: If you've made a large purchase and don't want to revolve the entire balance, consider converting the dues into EMI payments. HDFC offers a SmartEMI option that converts your outstanding amount into structured EMIs at lower interest rates. This helps spread your payments over time without incurring the high interest rates associated with revolving balances.
4. Reduce Spending: Cut down on discretionary expenses and allocate more funds toward repaying your outstanding dues. This will help reduce your debt faster and minimise the interest you pay.
5. Use Balance Transfer Offers: Some banks offer balance transfer credit cards with promotional 0% interest for a limited period. Transferring your high-interest balance to one of these cards can give you breathing room to pay off your debt without accumulating more interest. However, be mindful of the fees and the time limit for the promotional rate.
6. Seek Professional Advice: If managing debt is overwhelming, consider consulting a financial advisor or a credit counsellor. They can help you create a personalised debt management plan and provide guidance on improving your financial health.

A Costly Trap to Avoid

Revolving credit card dues are far more expensive than they appear, especially in India, where interest rates on credit cards can reach up to 43.2% per annum. Relying on revolving credit without a clear repayment strategy can result in significant financial strain, as interest quickly accumulates and increases your overall debt.

By adopting smarter financial practices, such as paying your balance in full, consolidating high-interest debt, and utilising EMI options, you can escape the cycle of revolving credit. Always stay informed about your interest rates and choose products with lower interest when necessary. Alternatives like personal loans from Quicklend offer more affordable options to manage and pay off debt.