In the US and UK, a recent popular trend is paying credit card dues via P2P borrowing. It may seem a bit odd for starters, as credit cards with their different offers seem to be the most lucrative credit offering. But swapping it to P2P makes lot of economic sense.

Consider the offers of a credit card typically forwarded in India. Any card has a grace period, which is advertised to be (say) 55 days. But what many fail to realize it this is the ‘maximum’ possible whereas actual grace periods depend on the number of days between the day of transaction and the due date of the next bill generated. Thus, for instance, if you make a transaction just the day before your billing date, you get the barely 20 days to pay it off.

Once a bill is generated and payment is not made by the due date, the entire balance attracts interest charges on a daily basis. This is critical as the quoted interest rates (2-3%) advertised to make the cards attractive is monthly rates which actually translate to very high annual rates. But calculating on a daily basis raises the interest bundle considerably. The average daily balance method of calculating interest is (outstanding amount x I% per month x 12 months) * no. of days / 365 where I stands for the advertised interest rate.

To complicate matters, any transactions done in the interim period till the previous due is paid off get no grace period at all! Thus, if you miss a due date, you not only pay interests on the amount outstanding as per your last bill statement, but also on transactions done after the bill date. Cash advances are most risky as cash advances by policy have no grace period at all, irrespective of billing date. This effectively means that if not repaid by due date, a credit card gets de-facto ‘locked’ and should not be used for any further transactions to avoid unnecessary interest burden.

Given such fine prints in the terms and conditions of credit cards, many customers have unknowingly fallen in debt traps over credit cards. It not only adds to the financial burden, but also affects one’s credit ratings as credit card bill payment is one important aspect of any credit rating.

Thus, increasingly people are borrowing from P2P to pay-off credit card bills. P2P loans have a fixed tenure and monthly repayment schedule. This means that the interest calculations are easier to understand and the burden is lower. The fixed tenure of e P2P loan is better than the open ended tenure of credit cards, as it helps plan one’s repayment schedule better. Many actually prefer this route to bolster their credit ratings by making timely repayments of credit card dues. It also helps prevent the card from being ‘locked’ in the sense that one is free to make interim transaction and get full grace periods as per normal norms.

Smart users are thus taking the dual advantage of making most out of the grace period on credit cards, and shifting to P2P to get a lower interest burden after the grace period. While such policies are generally not advisable and it is always better to pay-off the dues, this policy does offer a better option in cases of special cases of cash crunch that we all face at different points of time.