A study in November 2017 found out that the total amount of credit card debt had crossed a trillion dollars in the United States. The magnitude of this amount can be understood by the fact that India’s total GDP is just around $3 trillion, which means, credit card owners in US have debt equal to around 33% of India’s GDP.
The case is not particular to just United States. In India too, the amount of debt that customers owe to credit card companies is huge. One of the primary reason behind this is the fact that credit card companies have eased their eligibility criteria to offer cards to new professionals, who are often millennials. The young adults, who have recently gotten into their jobs, are not able to decide where to put a stop while using their credit cards and often, they end up exhausting the limits within months of getting the card.
The interest charged by credit card companies in case a customer is not able to pay the outstanding amount in full, is usually huge. Credit card companies charge around 2.5% to 3.5% every month on the total outstanding amount, which converts to 30-42% annually. The credit card holders often fail to pay the credit card debt and the amount keeps on multiplying.
Of late, one of the approaches that a lot of customers have started to follow to pay the credit card debt is by taking a personal loan and repaying in small installments. The millennials have started to see it as an escape from ever-increasing credit card debt and the approach has been on the rise in last couple of years.
What is a personal loan?
Personal loans are often unsecured loans, given by the banks without any collateral. Usually, the only things banks demand is a proof of a stable income. Personal loans come with a much lower interest rate compared to credit cards and can be paid in easy installments.
Using a personal loan to pay off credit card debt could help you save money on interest and potentially get out of debt faster.
Is a personal loan the right option?
Credit card debt repayment using personal loans may make financial sense in the short term. But a personal loan may not be a viable long-term solution unless you address the root cause of your debt. With the credit cards and loans freely available, customers often get tempted and this results in a huge debt on them eventually.
The young adults and fresh professionals need to make smart choices while dealing with finances. A credit card debt not only hampers the financial stability, but in most cases, it also affects the credit score, which might affect the chances of availing a loan in the later stages of life.