How to Win Over an Outstanding Credit Card Debt?

The Context

Financial institutions are the lifeline of modern societies and offering credit is one of the ways through which these institutions help grow businesses, human resources and economies.  However, the ease of access to institutional credit and availability of high quality goods at decreased prices in an open economy also puts an onus on us to practice financial discipline, stay focused on our financial priorities and not fall into the debt trap.

As Millennials i.e. those born between 1981 and 1996, our post liberalisation consumption sensibility has largely shaped us as consumers in contrast to the earlier generation raised with modest income and utilitarian consumption sensibilities. No doubt, the anecdotal evidence on financial stress in urban India correlates this cohort’s dependency on debt without proper financial planning and their poor physical and mental health. The sandwich generation of 35-49 year olds is another most stressed group with financial responsibilities.

These age groups are the key shapers of consumer market in urban India and consciously choose to borrow money to purchase specific goods, services or assets exercising the option of credit card.

How Credit card debt sets in?

When a consumer fails to pay off the minimum amount due on credit card for several months, the initial stressors or stimuli involves blocking of credit card account of the consumer, frequent phone calls and other forms of communication, followed by more threatening stimuli such as visit of loan recovery agents after 90 days, filing of police complaint or sending legal notices etc.

After about 6 months, the unresolved accounts are put under ‘recovery pool’ and as the final resolution stage, while the bank may term the credit card account as a loss, it could also rope in a Debt Collection Agency that would continue to seek debt repayment thereafter. While most defaulters face similar stressors/stimuli, limited sense of control over the events and struggle to pay off their debt, their response based on their perception of events and expectation of either positive occurrence in future or threats are different.

Stress as a response differs from one person to another. The American Institute of Stress explains this with an analogy of passengers on a steep roller-coaster ride where some riders are scared and hunched back in the back seat waiting for the ride to end, others are wide-eyed thrill-seekers and some others are bored or nonchalant. Their different responses are due to different perceptions of their sense of control over the events. Managing stress involves building an awareness of our faulty perception and revising them and teaching people to regain their sense of control.

The Correlation of Debt Stress and Health problems

Debt related stress manifests in physical symptoms such as difficulty in concentration and loss of focus, sleep related problems, overeating or under eating etc and is identified by medical professionals as ‘debt stress syndrome’.

Persistence of such stress when left unattended may result in chronic physical conditions such as high blood pressure, cardiovascular diseases, obesity, heart diseases, headaches and migraine, diabetes, weakened immune system, as well as mental and emotional conditions such as depression, self-isolation, low self-esteem and unhealthy coping behaviour including alcohol dependency and drug abuse.

Prolonged chronic illness in turn reduces one’s ability to be economically productive, financially secure and debt-free. These experiences may even affect the quality of life of immediate family, including the elderly and young children. Prolonged chronic conditions with no or delayed healthcare attention may eventually result in a shorter life span.

Debt stress is also likely to impair decision-making in favour of short-sighted responses at the time when sound problem solving ability can help get finances under control.

A Guide to Avoid Credit card Debts

We must begin to see credit and obligation to repay as part of one financial solution that comes with high interest rate, strict timelines and is tied to maintaining a good CIBIL score that is necessary for availing future personal loans.

To stay in control of one’s finances, a set of simple rules could be followed.

  • Identifying and prioritizing consumption requirements for oneself and family based on what is essential, improves quality of life and those that can be done away with. Based on whether these are recurring or periodic consumption needs or once in lifecycle events, a portfolio of financial instruments could be relied upon that will reduce the dependency on unsecured debts. For example, having a suitable health insurance plan for self and family over and above what is provided by the employer, is of utmost importance.
  • The Covid 19 situation has limited our consumption choices and options greatly and maintaining this frugality (to a reasonable extent) as the new normal, will help us in reviewing and doing away with discretionary expenses such as frequent purchases, eating out, paid subscriptions etc. It is also advised to lower the threshold of one’s credit card limit if one cannot manage it well or have a dedicated debit card and linked bank account with sufficient balance for making expenses on groceries, dining out, fuel, entertainment etc.
  • Building a corpus of emergency fund with easy liquidity option. Most financial planners in India rightly stress the need to park six months’ expenses in an emergency fund to take care of unforeseen situations like job loss, deferred salary payment, cancellation or deferment of performance bonus, conversion of fixed salary into performance based variable salary, medical emergencies etc.
  • Limiting the number of credit cards to one or two as a matter of financial discipline. Each card comes with an Annual fee+ GST and a Renewal fee+ GST that has to be paid even if the card is not frequently used. Cumulatively, several such payments add up to prominent figures. Using a mix of credit and debit cards for different types of purchases is also advised, apart from reducing the frequency of using credit cards.
  • Periodic tracking and making full, timely payment of credit card bills before due date, irrespective of the size of outstanding amount is the most commonsense, reliable approach to stay in control of one’s financial liabilities. When making full payment is difficult due to cash flow issue, one must at least pay the minimum amount due and plan to pay off the remainder on priority. However, an interest is levied on the entire outstanding amount (at the rate of 3-4 percent) while availing this deferred payment facility, till complete bill is settled. In case of non-payment of minimum amount due, an additional late payment fee is charged as penalty. Overall, the outstanding amount keeps increasing and becomes unmanageable and out of control.

It is important for the credit card holder to ensure that there is sufficient fund in bank account before one either issues cheques or depends on Auto Debit option or other Electronic payment method for making card bill payments. Creditors have been using legal recourses against the defaulted payments and this can be pressurising at times.

One’s physical and mental health is of utmost importance that should not be risked due to unplanned, discretionary spending. Managing one’s credit cards efficiently is a step in the right direction towards building good financial values.

In case you are undergoing a credit card debt stress, you can reach the debt counselling helpline of FREED.CARE at 9590-800-200 and the experienced debt counsellors shall guide your through!

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