If you are having difficulty paying your credit card bills or managing your debt, you could potentially end up paying a much higher cost than what you owe to your financial institution.
Mismanagement of what you owe can lead to not just higher interest rates, but a weak credit score, making your existing loan and any future loans expensive in the long run. A credit score is a three digit unique number ranging from 300-900 based on a person's credit-worthiness that licensed credit information companies such as Equifax draw up after collecting information from lenders.
Here are some ways to manage your debt to keep costs of borrowing down in the long-run.
Defaulting not only kicks in late fees and penalties, it can attract a higher interest rate on your credit card. This is usually buried in the fine print of your credit card agreement. In addition, defaults will negatively impact your credit report and score. Any new lenders can see all your previous defaults on your credit report, and will price any new loans accordingly. The credit report also reflects the details about the settlement of default payments with your previous bank.
Close any unused credit cards
Did you give in to a temptation to sign up for a store credit card to get the extra discount promised by a retailer? Unused cards can cost you in the long run. In addition to any hidden fees, they are viewed as existing debt and can potentially lower your credit score. Therefore, keep only credit cards that you use frequently and manage your payments regularly.
Good credit hygiene
Be realistic about what you can afford and don't max out your monthly installments and credit card spends. Higher credit utilisation impacts your credit score negatively. One simple way to reduce your Equated Monthly Installment (EMI) is to put more money down initially on your loan. This may take some saving initially, but it will help to protect you from monthly payments that are difficult to keep up. The amount of loan that you take impacts your debt to income ratio and your ability to get additional loans going forward.
Make timely payments
The most important aspect of keeping credit costs low is having a track record reflecting that you pay your debts on time -- EMIs, credit card bills or other lines of credit. Even delays in credit card or EMI payments reflect poorly on you overall credit, and kick in ugly late payment fees.
Limit your inquiries
Searching for new loans and credit cards indicates a greater chance of increased levels of debt burden, thereby negatively impacting your credit score. Instead of transferring your credit liabilities from one card to next, which can trigger multiple interest rates on several cards, there are ways to consolidate your debt for lower interest rates.
Consolidate your debt
Debt consolidation is a process of combining several unsecured loans e.g. credit card bills, medical bills, personal loans etc — into one loan. This simple hack can help you manage your debt, improve your credit score and even lower your interest payments. Debt consolidation is one of the critical financial planning tools if you are over-indebted.
Check your information
Regularly check that your credit bills and key notifications are addressed to your current address, and avoid chances of missing any payments. This will also enable banks to submit your latest details to bureaus. With a few simple checks and balances, you can stay on top of your debt and maintain a healthy credit score in the long-run.
(Manu Sehgal is Business Development Leader, Emerging Markets, Equifax)