Should you repay credit card debt with a personal loan or carry it forward? Find out the best solution | Mint

During a medical or any other financial emergency, in the absence of an emergency fund, an individual may use their credit card to tide over it. Once the emergency is resolved, the individual may arrange the funds and clear the credit card outstanding. However, what if no funds are available to clear the credit card bill? 

In this article, we will discuss the charges that a bank levies on carrying forward the credit card outstanding and whether an individual should take a personal loan to repay it.

Finance charges for carrying forward credit card outstanding

When a credit card bill is generated, the individual can pay the minimum amount due (MAD), the total amount due, or any other amount. If an individual pays the MAD or any amount more than the MAD but less than the total amount due, the bank levies finance charges on the amount carried forward.

For example, HDFC Bank charges 1.99% per month (23.88% per annum) as finance charges on the amount carried forward for Infinia, Infinia Metal, Diners Black, Diners Black Metal, BizBlack Metal, and H.O.G Diners Club credit cards. For all other cards, the finance charge is a huge 3.75% per month (45% per annum) on the amount carried forward.

The finance charge is levied at the monthly percentage rate on all outstanding transactions from the transaction date if the cardholder chooses not to pay the balance in full. The finance charge is also applicable on all cash advances till they are paid back. The finance charges are debited to the cardholder’s account till the card outstanding amount is paid in full.

If the cardholder carries forward an outstanding amount from the previous billing cycle, any new transactions in the current billing cycle will also attract finance charges till the previous outstanding amount is paid in full. The finance charge is calculated using the average Daily Balance Method and applied to balances carried forward and to new transactions.

Late payment charges

In the earlier section, we saw how the bank levies finance charges when a cardholder pays the MAD, or a higher amount but less than the total amount due. When the cardholder doesn’t pay the MAD by the due date, the bank levies late payment charges (LPC) in addition to finance charges. For example, HDFC Bank levies LPC depending on the outstanding balance as follows.

The above charges are excluding GST. The above charges are not applicable to Infinia and Infinia Metal credit cards.

GST on charges

There is an 18% GST applicable on all fees, interest, and other charges that a bank levies. So, the GST will apply to the above finance charges and late payment charges.

Should the cardholder convert the credit card outstanding to EMI?

In the above section, we understood the charges levied for carrying forward the credit card outstanding, whether after paying MAD or the entire amount, including MAD. Considering the high charges, it is not a good idea to carry forward the outstanding amount. So, then what are the options for a cardholder if they don’t have money to clear the partial or entire outstanding balance?

If the cardholder can pay the outstanding amount partially and the remaining amount within the next 1-2 months, they may carry forward the balance. However, bear in mind there will be finance charges of up to 3.75% per month on the outstanding amount.

The cardholder can consider the balance transfer (BT) option also. Some banks offer a lower interest rate, usually from 0.99% per month, for short-term BTs of up to 6 months. But what if suitable BT options are not available and it will take longer than 3 months to pay the outstanding? In such a scenario, the credit card outstanding may be converted into EMIs or the cardholder may take a personal loan to repay it.

Most banks give cardholders the option to convert the entire outstanding or specific transactions into easy EMIs. However, there will be a one-time processing fee and interest charges. The cardholder must check the interest rate being charged and the tenure (usually 6 to 36 months) options. If the cardholder is okay with the processing fee, interest rate, and tenure options offered, they may convert the outstanding into EMIs.

Should the cardholder pay the credit card outstanding by taking a personal loan?

If the cardholder is not okay with the EMI offer, they may take a personal loan and use it to pay the credit card outstanding. Check the personal loan processing fee and interest rate. If the cardholder is okay with the charges, they may proceed ahead with the personal loan. The personal loan money can be used to repay the entire credit card outstanding.

The personal loan tenure and EMI amount should be chosen in a way that suits the borrower’s cash flows and is easy on the pocket. The borrower must ensure sufficient money is maintained in the bank account from where the EMI will be auto-debited.

Should credit card outstanding be carried forward?

We have explored the various options available to a credit cardholder to pay the outstanding. To summarise, if the cardholder is confident of repaying the outstanding with their own money within 1-2 months, they may carry forward the outstanding. If it is going to take a little longer to clear, carrying forward the credit card outstanding may not be a good idea. 

In such a scenario, the cardholder may explore low-cost balance transfer options of up to 6 months. If it is going to take even longer than 6 months, the cardholder may consider converting the outstanding into easy EMIs or take a personal loan and use it to repay the credit card outstanding.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.