India’s Credit Card Defaults Hit Rs 4,000 Crore: Tips to Avoid
Credit card defaults are on the rise in India, as more and more people are struggling to repay their dues amid the economic slowdown and the Covid-19 pandemic. According to the latest data obtained from the Reserve Bank of India (RBI) under the Right to Information (RTI) Act, gross non-performing assets (GNPA) in the credit card segment of banks rose by Rs 951 crore to Rs 4,073 crore in the fiscal year 2022-23, up from Rs 3,122 crore in the previous year. This means that more than 2% of the total credit card outstanding of Rs 1.94 lakh crore at the end of March 2023 was not repaid by the cardholders.
Credit card defaults can have serious consequences for both the borrowers and the lenders. For the borrowers, it can lead to hefty financial charges, penalties, legal actions, and a negative impact on their credit score. For the lenders, it can result in higher provisioning, lower profitability, and increased risk of fraud and money laundering. Therefore, it is important for both parties to take preventive measures and avoid falling into the credit card debt trap.
How to prevent credit card defaults
The best way to prevent credit card defaults is to use credit cards responsibly and pay the bills on time and in full. However, if you are facing difficulties in doing so, here are some tips that can help you avoid defaulting on your credit card payments:
- Budget your expenses: Make a realistic budget of your income and expenses and stick to it. Track your spending habits and identify areas where you can save money. Avoid unnecessary purchases and impulse buying. Use cash or debit cards for your daily expenses and reserve your credit cards for emergencies or planned purchases.
- Limit your credit card usage: Do not use your credit cards beyond your repayment capacity. Keep your credit utilization ratio (the percentage of your available credit limit that you use) below 30%. This will help you maintain a good credit score and avoid paying high interest charges. Also, do not apply for too many credit cards or increase your credit limit unnecessarily. This will only tempt you to spend more and increase your debt burden.
- Pay more than the minimum amount due: The minimum amount due is the lowest amount that you have to pay on your credit card bill to avoid late payment fees. However, it does not reduce your outstanding balance significantly, as most of it goes towards paying the interest charges. Therefore, you should always try to pay more than the minimum amount due or ideally pay the full amount due every month. This will help you clear your debt faster and save money on interest charges.
- Consolidate your debt: If you have multiple credit cards with high interest rates and outstanding balances, you can consider consolidating your debt into one card with a lower interest rate. This will help you simplify your payments and reduce your interest cost. You can do this by either transferring your balances to a new card with a lower or zero interest rate offer or converting your outstanding dues into EMIs with a lower interest rate.
- Seek professional help: If you are unable to manage your credit card debt on your own, you can seek professional help from a financial counsellor or a debt management company. They can help you negotiate with your creditors, lower your interest rates, waive off some fees, and create a repayment plan that suits your budget and income. However, be careful while choosing such services and avoid falling prey to any fraudulent or unethical practices.
Credit card defaults are a serious problem that can affect both the borrowers and the lenders adversely. Therefore, it is advisable to use credit cards wisely and pay the bills on time and in full. However, if you are facing difficulties in doing so, you can follow the tips mentioned above to avoid defaulting on your credit card payments and get out of the debt trap.