How to manage your debt smartly in 2014

Harshala Chandorkar of CIBIL answered readers' queries on how to manage debt smartly in 2014 in an online chat, December 16.

Here is the unedited chat transcript:

Dinesh: Shouldn't banks also be made liable for people getting into credit card trap? Banks keep encouraging customers to use their credit cards by inducing them into attractive schemes and then come up with some fine print or the other and make that person's life miserable?

Harshala: It is the best for the customer to always read the fine print when such offers come out in the market. Tomorrow, even if you do go in for a credit card, make sure you use it prudently by staying within your credit limit and always repaying your credit card dues in time and in the full amount. Paying just the minimum balance and rolling over credit may look like an easy option in the short term, but actually works out to be more expensive for the credit card holder in the longer run. Prudent management of finances will ensure that your credit score stays healthy.

Zubeda-pawaskar: How can a CIBIL Credit Score help in coming out of a bad debt situation, if at all?

Harshala: In the case of a bad debt situation, accessing and understanding your CIBIL report will help you assess your own credit exposure. Based on this comprehensive information on your credit relationships you can plan debt repayments and track your progress regularly. If your credit score is low or if the credit report shows defaults and delayed payments you can always take corrective actions and improve your credit score before applying for the loan. Financial discipline coupled with regular repayment of loan and credit card EMIs will help improve your credit history and score significantly and in turn improve your financial situation.

Vijay: I want to get out of debt of Rs 20000 I borrowed from my friend without any interest. Instead, my home is girvi with him. It is a small room on the outskirts of mumbai, near boisar in thane district.

Harshala: Check if you can pay the amount over a period of a fixed few months (maybe 6 months or so) and start saving some money every month ensures that this payment is made at the end of this period. Careful planning on your part should ensure that the payment is made without any hassles.

Kunika: How about going for gold loans to retire costly credit card debt? Will it work out? Am planning to pawn my family's gold worth 400 grams to get out a really bad situation I have gotten myself into because of gambling and day trading in futures and options in the stock markets. Please answer.

Harshala: Taking one loan to repay another may be a good move in the short run. In the event that you decide to go in for a gold loan, make sure you have the financial capacity to repay the gold loan as well. In case you do not, you will fall into a debt trap with loan outstandings.

Tushar: My friend needs help? He is over-burdened with debt and I am planning to lend him Rs 30,000 as help. The rest -- Rs 60,000 -- he is planning to take a personal loan. Later he plans this personal loan to his credit card account. Is this a wise step?

Harshala: The key point to remember is to make sure to borrow only as much as you can repay. He may find it difficult to get a personal loan if he has been defaulting on his credit card debts as banks will check his CIBIL report and score before approving his loan applications. It is imperative for him to start saving and planning wisely inorder to repay his debts and not opt for another loan till his present situation improves.If he has credit card debts he can approach his bank to convert the dues into personal loan as the rate of interest will be lower on this loan than that of the credit card. If he is unable to do so, he will enter into a debt trap.

Amit srivastav: I owe Rs 1.27 lakh -- interest-free -- to my brother and plan to return it to him the entire amount next year. I earn Rs 70k per month. How do I go about it. My monthly expenses are Rs 45k. Please suggest a monthly plan?

I am assuming you have 12 months to repay the loan. Post your monthly expensiture you have 25K excess. You should invest that in bank Fixed deposits. This savied amount will provide you interest. Keep saving every month and when you have accumulated enough money repay your bother. Through this approach you may be able to repay your debt to your brother earlier than 12 months.

Guddy: Tell me about precautions I must take before going for costly loans? Under what conditions can they prove harmful a costly to me?

Harshala: Before going in for any kind of a loan you must check the following three factors:

• Capacity - Your ability to repay the loan amount
• Collateral/Capital – Possession of assets which act as a secondary source of repayment of the loan in case you are unable to pay if off your monthly income
• Credit exposure and health: How much debt you are already under and how has your credit behavior been as reflected in your CIBIL report?
• Assessing these factors will help you in planning the best course of action for availing any form of loans.

Jinny: What according to you should people laden with debt do? Should they approach a debt counsellor? How does engaging a debt counsellor help people?

Harshala: Access your CIBIL report for detailed information regarding your credit history. Your CIBIL report gives you significant insight into your debt exposure managing behavior over a period of time through detailed information regarding the total number of accounts and enquires. Prudent financial management coupled with the following tips can improve your financial state. You may engage with a debt counselor if you wish in order to help you plan your repayments better. Many banks have free of cost Financial Literacy Counselling Centres which help consumers in credit and debt management.

Kaushal: Explain how can one use her/his credit card smartly and never get into a trap whereby the person keeps accumulating interest charge and fines month after month?

Here are a few tips on using the credit cards to your advantage and towards building a good credit score and maintaining a healthy credit history.

1. Make regular payments on credit card bills.

2. Do not apply for the card if you don’t need it.

3. Always ensure that you pay the card bills in full or atleast the minimum due each month. Please ensure to repay the full amount with interest levied as early as possible if you have paid only the minimum due on the card in the past.

3. Once you have availed a credit card, it is advisable to keep it for at least 12 months before closing it.

4. If the add-on facility has been available, which means adding additional card onto your main credit card for any dependent such as spouse or child, it becomes important to monitor and make regular payments on these cards as well.

5. Setting an alert on credit card payments is a useful way to keep an eye on the usage and spending.

6. Access your CIBIL report and score regularly to keep a track of your credit history.

Sonal: Do you have a 10-point plan in general that can be used to smartly manage credit?

Harshala C: Some of the important things your should keep in mind while borrowing are :

1. Borrow only as much as you can repay

2. Make sure you make payments of your dues and EMIs on time

3. Spend wisely on your credit cards

4. Keep a tab on all your expenses on your credit card; which will help you analyse if you are over spending

5. Make sure you access your CIBIL Report and Score once a year

Mustafa: Why do mostly people get troubled by credit card debts? What is so bad about them? If the risks of owning a credit card are so high why do the RBI allow banks to issue credit cards to all and sundry? How can the situation be changed?

Harshala: Credit cards offer consumers the access to readily available credit for immediate and expensive purchases. This can definitely work in your benefit if you pay the dues off on time. Only if you fail to pay off your bills or balance due, do interests accumulate. This makes it important to use credit cards wisely and only make purchases that you know you can afford and can budget for. In addition, to avoid late fees or interest fees you could pay off the card well before the due date. Hence significant restrain and financial planning can ensure that a credit card works in your favor rather than trapping you in debt.

Chirag Cheran: I have a debt for Rs 4.5 lakh on which I pay an annual interest of Rs 80,000. How can I smartly manage this debt in 2014 My per month take home is Rs 1.5 lakh.

Harshala C: What is the rate of interest that you are paying for your debt? If you have funds to repay the loan you should take that option assuming you have no investment opportunity that will fetch you higher rate of interest. If the investment opportunity will fetch you a return which higher than the rate of interest on the loan then it is better you invest your surplus funds and make EMI payments pm.

Kartik Dhadda: What kind of debt should one retire first? Secured or unsecured? why?

Harshala C: If you have taken loans of any type - secured or unsecured, you should make payments on time for both these categories. This will help build a positive credit history and a good credit score. If there are financial difficulties you could approach your bank to restructure your loan.

Jeswal: I own three credit cards right now and am running an outstanding of 36k. I want to cancel two and just go with one after retiring an outstanding of 24k on the two cards I want to cancel. How will it help me reduce my debts and lead a prudent financial life?

Harshala: The best step here would be to completely clear all your dues with the credit card companies before closing cards. In the event that you are unable to do so, it will reflect negatively in your CIBIL report. As for the third card, use it wisely and pay your dues in full by the due date. Avoid rolling over credit, as your outstanding actually piles up to be a huge amount which you may be unable to pay in the long run.

Dananjaypuri: Could you list 10 important as well as silly reasons why people get into debt traps? Any tips on how to avoid getting into such traps?

Harshala C: Some of the important things your should keep in mind while borrowing are :

1. Borrow only as much as you can repay

2. Make sure you make payments of your dues and EMIs on time

3. Spend wisely on your credit cards

4. Keep a tab on all your expenses on your credit card; which will help you analyse if you are over spending

5. Make sure you access your CIBIL Report and Score once a year

Vijay: I am planning to go for a housing loan in 2014? I earn Rs 63k per month and plan to borrow Rs 25 lakh for a small home in Bengaluru? I am already paying Rs 10k as EMI for a personal loan that I had taken in 2010. This loan will be closed by March 2014 after which I plan to go for a home loan. Is that a good idea?

Harshala: As long as you have been able to successfully repay your earlier loan, without defaulting, going in for a second loan is fine. But please remember not to miss any payments on the second loan. Make sure you have adequate liquidity to repay the new loan and do not rush into anything. It will be advisable to get a copy of your CIBIL report to check your credit standing.

Satish Pulli: What in your opinion is the best way to borrow money without getting entrapped? What kind of loans should one prefer and what kind of loans is a strict no-no?

Harshala: Before you apply for a loan you should consider the following:

• Capacity - Your ability to repay the loan

• Credit History – An individual’s credit history as reflected in the CIBIL report plays a vital role in the approval of the loan application.

• Collateral/Capital – Possession of assets which act as a secondary source of repayment of the loan. Unsecured loans such as credit cards or personal loans have higher interest rates and require prudent financial planning and should be availed of only if required.

Secured loans like home loan or auto loan weigh higher on a person’s credit score and they are by far less expensive than unsecured loans like personal loans or credit cards.

Amol chille: How much debt is ideal for a person assuming that the person owns Rs 50k per month and has household expenses of Rs 25k?

As a Rule of Thumb the lender will likely view your application negatively if your Income to EMI ratio is close to 50%. You may calculate your loan eligibility and income to EMI ratio using a loan calculator available freely on many banking websites.

Panse Kaisare: How not to get into a debt trap? Could you please explain?

Harshala: Here are a few tips to avoid getting into a debt trap:

• Be credit wise: Gaining a wise knowledge of your personal finances and learning how to manage them, and developing a plan that monitors your spending activity is essential so you do not lag behind in your monthly loan and credit card payments and end up in debt.
• Do not apply for loans of credit cards if you do not actually need it.
• Pay your loan and credit card EMIs month on month by the due date. Never default on any payments.
• Monitor your co-signed, joint accounts monthly. Also ensure that you monitor the loan accounts for which you have stood as a ‘guarantor’
• Access your CIBIL report and score regularly: Knowing what’s on your credit report will help you in managing your finances better and also alert you on any possible identity thefts and incorrect information on your credit report.

Venkatesh: How can one know if s/he is smartly managing the debt burden on her/him? How can one know if s/he is on track? Is there any tool that will help me get off my debt burden?

Harshala: Your CIBIL report gives you significant insight into your debt managing behavior over a period of time. It provides detailed information regarding the total number of accounts and enquires (up to the last 24 months). The accounts section contains details of your credit facilities and the enquiries section provides details regarding loan applications.

Keep a regular check on your expenses. Make it a habit to also check your CIBIL report and score on a regular basis as well. This will help you see yourself as lenders do and will enable you to factor in any changes in your spending behaviour, if required. Smart money management will help you relieve yourself from your debt burden.

Dawar Sheth: My friend was neck deep in credit card loans. To settle that he took a personal loan from two different banks worth Rs 15 lakh to cover his dues of Rs 7 lakh and the rest he has invested in stock markets? How can he manage his debt in 2014? Is investing in stocks to earn higher return and repay his debt a workable idea? Please guide.

Harshala: It is best to pay your credit card dues in time and in the full amount, instead of just paying the minimum balance. Going by the fact that he has already paid off his credit card dues by taking a personal loan, he now has to repay the personal loan as well. It is necessary for him to make sure that he pays his loan installments on time. Make sure he does not get into a loop of borrowing for repaying any outstandings. It is imperative that he makes prudent financial decisions before going in for any major loans. Please remember that it is not advisable to take a loan and plan to repay basis earnings that are linked to stock markets.