“Why is my credit card balance not reducing even after regular payments?” Many people wonder the same.
Let’s consider Ramesh, who has ₹2,00,000 in credit card debt spread across four cards with an average interest rate of 36% annually. Each month, he pays ₹10,000 across these cards, but most of it goes towards interest. Sound familiar?
Here’s the problem: ₹10,000 barely scratches the surface when high interest consumes the bulk of it. Using a debt consolidation loan, Ramesh could take a loan at a 12% annual interest rate. This way, his monthly EMI would drop significantly, and he would repay the debt faster.
According to recent data from TransUnion Cibil, credit card defaults have risen from 1.6% in March 2023 to 1.8% by June 2024.
Let’s break it down further.
Why Choose a Debt Consolidation Loan?
A debt consolidation loan combines all your debts into one payment at a lower interest rate. For instance, instead of juggling four cards, Ramesh consolidates his debt into one loan of ₹2,00,000. With a 12% annual interest rate over three years, his EMI would be ₹6,657 (approx.). Compare this to the ₹10,000 he pays now, mostly on interest.
This move saves money and simplifies life. You’ll pay one EMI at a lower rate, making your debt journey less stressful.
How to Calculate Savings with a Debt Consolidation Loan
Here’s a calculation table to help you understand better:
| Details | Without Consolidation | With Consolidation Loan |
| Total Debt | ₹2,00,000 | ₹2,00,000 |
| Interest Rate | 36.00% | 12% |
| Monthly EMI (approx.) | ₹10,000 | ₹6,657 |
| Interest Paid Over 3 Years | ₹1,16,000 | ₹43,652 |
| Savings | — | ₹72,348 |
This shows how big the difference can be! You’ll pay less in interest and keep more in your pocket.
How to Consolidate Credit Cards?
Consolidating credit card debt can help you manage your finances better. Here’s how to do it effectively. First, list all your credit card debts with their interest rates. Look for a personal loan with a lower interest rate than your cards. Apply for this loan to pay off all your credit card balances.
Now, you’ll have just one loan to repay instead of many cards. Another option is to use a balance transfer credit card. This card offers a low or zero interest rate for a set time. Transfer your other card balances to this new card. Make sure to repay the full amount before the low-rate period ends.
You can also talk to a financial advisor for help. They can guide you on the best way to consolidate your debt. Remember, after consolidating, avoid using your credit cards for new purchases. Focus on paying off your debt fully.
What Are the Common Pitfalls?
Even a debt consolidation loan has risks. Avoid these mistakes:
- Continuing to use your credit cards: Don’t pile on new debt while repaying the loan.
- Choosing a longer tenure without thought: Lower EMIs might feel good, but longer terms mean more interest overall.
- Not reading terms: Watch out for hidden fees like processing charges.
Conclusion
Credit card debt can feel like a trap, but it doesn’t have to be. With a debt consolidation loan, you can reduce interest, simplify payments, and take control of your finances. The key is to calculate savings, avoid new debt, and stay disciplined.
What’s stopping you from consolidating and saving ₹50,000 or more? The right decision today can secure your financial future tomorrow.
FAQs
- What is the ideal credit score for a debt consolidation loan?
A score above 750 ensures better interest rates. - Can I consolidate loans other than credit card debt?
Yes, personal loans, payday loans, and other debts can also be consolidated. - Does a debt consolidation loan affect my credit score?
Initially, it might dip, but regular payments improve your score. - Is debt consolidation loan the best option for everyone?
No, it depends on your interest rates and repayment ability.
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