A credit card is issued by a bank or financial institution to a cardholder to borrow funds that could be used for purchase of goods or services to the extent of the limit prescribed. At the time of signing the application form for issuance of credit card, a personal loan agreement is signed by the applicant, that includes all the relevant clauses to safeguard the issuer’s interest, should there be a default. Additionally, the applicant also signs a security cheque that is undated and preserved by the issuer, as collateral, should there be a default in payment of credit card dues.
Any transactions being undertaken using the credit card are recorded in the issuer’s records and a statement is generated at the end of the billing period for the credit card holder to pay the dues on or before the prescribed deadline. These dues, if unsettled consecutively for a period of three months, is considered an event of default.
Beyond the stipulated timeline in the personal loan agreement, the issuer of credit card has the right to present security cheque to the bank for payment. In case this security cheque is returned unpaid due to insufficient funds, the issuer will then proceed ahead to file a legal case against in the court to recover outstanding dues. The issuer may also request the court to impose a travel ban.
Further, the outstanding amount that is due for payment will continue to attract penal interest until the dues are settled in full. Not to miss out on the fact that your credit score will be affected that will reduce your chances of seeking loan or credit card in future.
While we sympathise with you in the current times, it is prudent for you to approach the issuing bank or financial institution, present your case, and seek relief in terms of settling these dues in instalments and seek waiver from payment of penal interest before they proceed ahead to file legal case in the court. The issuing bank or financial institution reserves the right to accept or reject this request but a modest attempt from your end may turn out in your favour.
Planning one’s finances is not a challenge but a chance to understand the intricacies of money and finance. While the number in the equation differs from person to person, you may choose to apply a thumb rule of 50-30-20 to cover needs-wants-savings. Fifty per cent of your net take-home pay could be allocated to cover your monthly payments and expenses. Thirty per cent of your net take home pay could be allocated for discretionary spending of your choice. The balance of 20 per cent be allocated to savings and you may choose to accumulate this savings to cover at least six months of your monthly payments. Beyond this accumulation of savings, you may also opt for a long-term insurance plan that would be beneficial at the time of retirement. You may tweak the rule to 60 -20-20 also, depending upon the need with the aim to give preference to savings vs spending.
The writer is the CEO of ZTI Global.
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