It is difficult to find a person, who will say no to free credit if he understands the power of compounding. Credit cards provide you free credit for approximately 50 days. So everyone who uses it should be happy and enjoy the purchasing power. Quite often, however, we get to hear stories of people getting caught in the debt trap due to mismanagement of credit card.

Apart from the favour-able aspects such as free credit period, there are negative factors that need to be absorbed by the individual to enjoy a credit card responsibly. The first is the high rate of interest that is charged if you don’t pay the full outstanding after the 50-day grace period.

This period is very short. If you don’t repay the amount within this period, you have to pay interest in the range of 37 per cent. It’s very difficult to find any investment option which can fetch returns in the range to 37 per cent on a continuous basis. Now that you are aware of the flip side, let’s discuss some steps which you must take to avoid such a debt trap.

Check for interest rate on your card
If you do a comparison of interest rates being charged by credit card companies, you will be surprised to know that there is quite a lot of variation. The variation is in the range of two to three per cent, which is quite lucrative for a big amount. Use the card with the lowest interest rate for shopping. This will save you quite a lot in terms of interest expense.

Bargain hard while applying for a card
While applying for a new credit card, just do a little bit of research regarding the lowest interest being charged by different banks. It’s not difficult to get a credit card with even lower interest rates if you bargain hard with the bank. If your credit score is good and you have never defaulted on any loan in past, it makes the bargain easier.

Work on your debt to income ratio
You can calculate this ratio by dividing your total monthly debt obligations by your total monthly income. You should keep this ratio in the range of 20 to 40 per cent to maintain a stress-free lifestyle. Strive to maintain this at all costs. The availability of free credit always lures you to increase this ratio. A check on any impulsive shopping will keep this ratio within limits.

Implusive shopping can be damaging
If you don’t resist implusive behaviour, you would be sitting in front of your monitor and toggling with different windows, showing your multiple credit card statements. You would also be chiding yourself on the kind of money that you have spent and owe on the various cards!

If you are in credit card trouble:

* Pay off the dues on the credit card with the highest interest rate first
The reason is quite obvious as it’s going to reduce your future repayment bill. This will reduce the interest expense and would allow you repay the outstanding principal in a lesser time.

* Pay more than the minimum amount due
Banks generally keep the minimum amount due as low as possible, so as to gain by charging the high interest rate on the outstanding amount. If you are not in a position to pay the amount in full, try to pay as much as possible to minimise your interest expense.

* Negotiate with bank for a lower interest rate
Here your past credit history comes into play. If you have been a good customer with no default history, you can bargain with the bank for a slight reduction in the interest rate. You can also bargain for some unnecessary fees to be waived. You ne-ed to be persistent in your bargaining as it might be difficult to convince the bank. If it’s the case of late payment, you can get your late payment fee waived. If you have been using the credit card of the bank in question for more than one year, the negotiation becomes quite easy.

— The writer is the CEO of bankbazaar.com