How to size up your post-Diwali debt

For many Diwali means time to indulge. The happiness the goods bought brings to an individual, sometimes make her/him land in a debt trap.

Bombarding of discount offers, cash back, EMI schemes, buy one get two free offers ensure that some of us do go overboard while shopping. If you are one of those who is now staring at your credit card bill and wondering how to go about it, here is the way out.

Size up the situation first

Early signs of trouble and one gets tempted to easy way out. Banks issuing credit cards are more than keen to offer balance transfer and that sounds an easy ways out. However it postpones the problem than solving it. Hence one has to use balance transfer sparingly.

Instead try to figure out your problem -- debt, in detail.

List down what you have bought and the cost of funding and the time you have on hand to repay it. If you can prepare a list of all your purchases, you are half way through.

You can then set your priorities.

Credit card debt -- kill it first

After the advent of credit cards, most people in debt trap typically have huge credit card outstanding. The interest rates on credit card outstanding if not serviced before due date, ranges between 36 per cent per year to 42 per cent per year. Aim to retire this debt first. If you cannot pay-off your credit card outstanding replace it with some cheaper option such as asset backed loan and personal loan.

Cheaper loans are welcome

If you have a home loan, approach your bank for a top up loan. This will ensure that you borrow at possibly lowest cost possible. The rate of interest is around 12 per cent.

If you have some investments such as traditional life insurance policies, shares, mutual funds units or even fixed deposits, you can consider raising loan against them. The rate of interest is generally low.

For example, a loan against fixed deposit is available at a rate of interest of one percentage point more than that of available on fixed deposit. If the fixed deposit earns a rate of interest of 9 per cent, the loans against FD rate will be 10 per cent.

Loan against fixed deposit is a temporary solution. It does not work for large pile of debt.

In such situations it make sense to sell some of low yielding investments such as fixed deposits and reduce the loan pile. You can also consider raising personal loan at around 16 per cent to 24 per cent for a three year time frame, and prepare a plan to service it.

Getting back to normal

If you have sold some of your investments, do share it with your financial planner and make it a point that you replenish them as soon as possible. Your Diwali shopping should not put your long term financial planning off track.

After the Diwali mood is over it makes sense to have a tough look at the list of your shopping and funding options that you made above. This time you have to identify what are the useless things that you have bought. The sooner you admit it, the better off you will be, if and only if, you sell such unwanted items.

Do not hesitate to sell it at a discount. Cash that you will realise in this way, should be used to retire some debt.

If you do all these things, you will gradually come out of debt trap, and maintain your CIBIL credit score, which if it stands above 750, speaks about your attractive credit profile.

Festival season is yet not over. Christmas and New Year is round the corner.

Make it a point that you will be selective when it comes to shopping going forward. Start with a shopping list than buying things that you see and use debit cards and cash cards, if you cannot control your shopping when you are using credit cards.

It takes time to build your wealth and credit score, never allow one festive season to ruin it. Happy festive season.

Photograph: Mike Segar/Reuters

Note: Picture used only for representational purpose

The author, Director & Co-founder of Creditvidya.com, is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.