How to Consolidate Credit Card Debt Without Affecting Your CIBIL Score?

Reena, a 30-year-old marketing professional, always said, "Paise toh haath ka mail hote hain," until her credit card bills started 

piling up.

• She spent ₹20,000 on a shopping spree
• Her total outstanding debt is ₹1,50,000 across 3 credit cards
• Interest rate: 36% per annum (approximately 3% per month)
• Monthly EMI (minimum payment): ₹7,500+
• CIBIL score: She lost points on her CIBIL score, which dropped from 780 to 650 because she failed to pay her debts.

With every billing cycle, her debt felt like a never-ending chakravyuh. She sighed to her friend Aman over chai, "Bas ab aur nahi, yeh credit card ka chakkar mujhe le doobega!"

Aman, the consultant, broke it down like this:

• Get a debt consolidation loan and transfer all credit card balances into one loan with a lower interest rate (e.g., 12% per annum instead of 36%).
• You can lower your EMIs by taking a personal loan at 12% for ₹1,50,000 and reduce your monthly installment to ₹5,000 for a 3-year term compared to existing payments exceeding ₹7,500.
• Improve your CIBIL score by making on-time payments on your loan to reach a score of 750 or higher.

"Arre tension mat le! Debt consolidation kar, interest bhi kam hoga, aur CIBIL score bhi bachega," Aman assured her.

If you're also struggling with credit card debt like Reena, worry not; this narrative discusses how you can consolidate your debts while saving your CIBIL score. Let's begin!

What Is Consolidation?: ‘Bhool Bhulaiyaa’ Of Credit Card Debt

Debt consolidation enables customers to consolidate all their debt obligations into a new loan and repay the loan comfortably at a lower interest structure without causing any financial burden. 

Credit card consolidation is when you merge debts with only one bill to pay. You can do this by taking out a personal or consolidation loan or transferring your balances onto a low-interest credit card.

Suppose you borrowed ₹1,000 from your friend to buy a nice-looking pair of sneakers. You promised to pay him back ₹200 a month for that amount, but this friend says, "You are paying slowly, so I will be charging you an additional ₹50 a month until you clear the entire ₹1,000." The additional ₹50 is called interest, the cost you have incurred for borrowing money.

What if, on impulse, you borrow money from several friends to buy everything you want: gadgets, clothes, and movie tickets? The next thing you know, you owe a significant sum of ₹10,000! 

But since you’re slow at clearing debts, more interest builds up, and before you know it, your ₹10,000 debt turns into ₹15,000 or more! That's how credit card debt accumulates!

Why is Credit Card Debt Dangerous?

Credit cards give you buying power, but smart usage keeps you out of financial trouble!

Will Debt Consolidation Lower Your CIBIL Score? ‘Darr Ke Aage Jeet Hai!’

Debt consolidation creates a short-term dip in your CIBIL score while implementing responsible management, which can lead to long-term credit score improvement. Here's how:

How Debt Consolidation Affects Your CIBIL Score?

Foolproof Ways to Consolidate Debt Without Hurting Your Credit: ‘Ameer Banega India!’

1. Choose the Right Consolidation Method

• Personal Loan (Best Option):

I.Interest: The personal loan offers an interest rate between 12 and 15% per year, better than the 36% rate on credit cards.

II.This option reduces EMI payments and establishes a positive payment history when payments are made on time.

• Balance Transfer Credit Card:

I.Interest: 0% for 3-6 months, then 24-36%

II.The benefits of this option include temporary relief and elevated interest rates after the introductory period ends.

• Debt Consolidation Loan (from banks/NBFCs):

I.Interest: 11-16% per annum

II.With debt consolidation, you can transform numerous debts into a single EMI payment.

2.  Keep Old Credit Cards Open

• Closing old credit cards reduces the duration of your credit history, which may lead to a 10-20 point decrease in your CIBIL score.
• The best strategy to maintain a good credit mix when dealing with multiple credit cards is keeping them active with minimal or no spending activity.

3.   Maintain a Low Credit Utilisation Ratio

• Once your debts are consolidated, you should refrain from reaching the maximum borrowing limits on your credit cards.
• The optimal credit utilisation should stay below 30% (for example, use only up to ₹30,000 from a ₹1,00,000 credit limit).

4.   Pay EMIs on Time

• The CIBIL score reduces by 50+ points when you miss an EMI payment.
• Set up automatic debits from your bank account to prevent payment delays.
  
  

5.   Avoid Frequent Loan Applications

• Each loan inquiry reduces your CIBIL score by 5 to 10 points.
• Apply for a single, well-planned loan instead of multiple loans.

Using Personal Loans To Pay Off Credit Cards: “Sharma Ji Ka Beta Did This: Should You?”

A personal loan can relieve debt for people who struggle with high-interest credit card payments. People must use personal loans cautiously to prevent additional stress from financial problems.

Why Use A Personal Loan For Credit Card Debt?

How a Personal Loan Can Help!

• Lower interest costs: If you are paying ₹4,500 per month on credit cards, which have accumulated to ₹1,50,000 at a 36% interest rate, a personal loan at 12% interest would bring this down to just ₹1,500.

• Convenient single EMI: Instead of multiple due dates, you have just one fixed EMI to pay, reducing missed payments.

• Boosts CIBIL Score: If paid on time, EMIs improve the score by 50+ points in 6 to 12 months.

Balance Transfer Cards Explained! “A Khatron Ke Khiladi Move?”

A balance transfer credit card allows you to transfer the debt of an existing high-interest credit card to one such credit card with little or zero interest for a limited time. This saves you from high-interest payments, making it easier to clear your debt.

How A Balance Transfer Works (With An Example)

• Suppose you take out ₹1,00,000 debt on your credit card at an interest rate of 36%. 
• Then, you transfer this amount to a balance transfer card with 0% interest for 6 months. 
• You will get 6 months to repay without paying any extra interest, saving you ₹18,000! 
• After that, this new card will charge you 24% to 36% interest for whatever's left. 

Enrolling In A Debt Management Plan: ‘Baat Ban Jaaye!’ 

Borrowers can restructure their debt repayment through a Debt Management Plan by securing reduced interest rates while meeting all payments through one monthly installment. Credit counselling agencies provide Debt Management Plans to assist borrowers who need help managing their overwhelming debt.

How A Debt Management Plan Works

Example

Assess Your Debt

A credit counsellor reviews your debts, income, and expenses.

Suppose you have ₹3,00,000 in credit card debt at 36% interest.

Negotiate Lower Interest

The agency negotiates reduced interest rates with creditors.

Your interest drops from 36% to 12%, reducing monthly interest costs.

Single Monthly Payment