Credit cards or borrowing loans can provide an individual a breathing space and much-needed liquidity in hard times. However, reckless credit card spends or aimless borrowing can be a sure way to get into a debt trap and can derail an individual's to achieve financial goals and eat into hard-earned savings.
Here's an eight-point guide on how to reduce the debt burden:
Follow a strict budget
By following a strict budget, Pranjal Kamra, CEO of Finology believes that one can avoid falling into a debt trap and can even save for long-term financial goals.
“The appropriate way is to keep aside the amount required for repaying the debt and then taking care of monthly expenses. It’s vital to prioritize monthly expenses and only consider spending on essential things if the loan amount to be repaid is high,” adds Nitin Mathur, CEO at Tavaga Advisory Services.
Also read: Signs that show you are nearing a debt trap
Make a list of all debts in one place
As per Mathur, the primary step in reducing debt is to take a stock of all debts (student loan, credit card dues, etc.) in one place. Along with the type of loans, it’s advisable to include the balance amount to be repaid and the minimum payment tenure.
This will help the individual in calculating the total debt he/she owes and formulating a plan to get debt-free as early as possible.
Understand the nature of debt
According to Anil Pinapala, Founder & CEO of Vivifi India Finance Private Limited, the key is to understand the nature of debt so that young borrowers can consolidate smaller loans or higher-cost loans into a longer-term, lower-cost loan thereby reducing their overall repayment burdens.
Create a sensible debt repayment strategy
For those who are already under a heavy debt burden, Kamra of Finology suggests creating a sensible debt repayment strategy.
“The first thing would be to avoid any new debt, particularly credit card debt. If it is getting difficult to pay EMIs, one can plan to sell some of their investments or non-income-generating assets and use the proceeds for debt repayment,” Kamra says.
Many a time, lenders also offer debt restructuring options that would help borrowers to accelerate debt repayment.
The other methodology, according to Abhishek Soni, CEO & Founder of Upwards, is to switch some of the unsecured loans to gold loans or home loan top-up which also reduces the burden of debt.
Those who are running multiple credit cards or personal loans should consolidate outstanding balances into a single loan, Soni advises.
“This will not only reduce interest cost but also streamline cash outflows much more. It will also make it easy to track repayments for a single loan as compared to multiple loans,” Soni tells.
Cut down on any subscription-based expenses
Subscriptions that are not needed or used frequently like gym membership etc can be cut down.
"A small saving per month can lead to a large lump sum saving over a couple of months in the future," Soni stresses.
Inculcate a disciplinary approach for repaying debt
It is also important to be disciplined about repaying promptly which helps in keeping away from more fees and penal interests and also improves credit score which in turn gets better loans.
Along with making a schedule for repaying the debt, Mathur of Tavaga Advisory Services says that one must ensure that the deadline to repay the monthly installment is strictly adhered to. Else, the interest burden will further erode the financial health and spoil the credit score.
Prioritise credit card dues before personal/student loan, if any:
The interest rate on credit card dues generally tend to be higher than the personal/student loan interest rate.
Therefore, Mathur advises borrowers to consider repaying the credit card dues as early as possible.
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First Published: IST