Credit Card Defaults Rise To Rs 4,000 Crore In India, Here's How You Can Avoid It

More than Rs 4,000 crore - that¡¯s the extent to which credit card defaults have risen in our country. In the last financial year FY2022-23, credit card defaults rose by Rs 951 crore to reach Rs 4,073 crore. The figure was Rs 3,122 crore in FY22, according to data obtained from the RBI under the Right to Information (RTI) Act, as per Business Standard.

Note that when compared to common retail loans such as home loans, car loans and personal loans, the interest rates (in the form of finance charges) associated with credit cards are much higher, going up to 49%-50% p.a. The RBI has raised concerns over this rise in unsecured lending on financial stability. In addition to this, the RBI has highlighted concerns over the growing risk of delinquencies on unsecured loans amid high interest rates and high inflation.

Amid the rising credit card defaults, the RBI issued guidelines effective from July 1, 2022, wherein credit card issuers have to give a seven-day notice period to cardholders informing them about their intention to report them as defaulter to the credit bureaus and allow them to clear their outstanding dues during this period.

Besides the hefty financial charges and penalties, credit card defaults and other irregularities also harm your credit score significantly.

How To Come Out Of Credit Card Debt Trap

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Also Read: Warning Signs Of Approaching A Credit Card Debt Trap

Convert your outstanding dues into EMIs

Banks and other credit card issuers mostly allow the conversion of existing credit card outstanding into EMIs. They also allow their cardholders to convert specific big-ticket transactions into EMIs. This can be helpful if you have piled up debt, as the interest rate of such EMIs ranges between 12% and 24%, which is much less than the finance charges levied on outstanding dues.

Credit card balance transfer

This option allows the cardholder to transfer the outstanding balances of their existing credit card(s) to another credit card at a lower finance charge (interest rate). This is especially helpful if the existing card issuer refuses to convert the dues into EMIs or does not offer the facility.

The bank or other card issuer of the transferee card usually offers a promotional interest period during which it charges a lower or even zero interest rate on the balance transferred. This duration of the promotional period usually ranges between two to six months, wherein the lower or nil interest rate slows down or stops the accrual of finance charges for a limited period, and provides the cardholder a window to save money and arrange funds for the repayment of the transferred balance.

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Also Read; Why CEO Tim Cook Was Almost Denied An Apple Credit Card

Take low-cost loan if feasible

The interest rates of personal loans, gold loans etc. are much lower than credit card finance charges. That is why it can be a feasible option to take a low-cost loan to pay for your outstanding credit card dues. If you have a home loan, you can go for a top-up. Otherwise, if you are getting a personal loan at relatively lower interest rates, then you can consider that too. Credit card users with piled-up debt can also opt for secured loans like gold loans and loans against securities as their interest rates are much lower than the credit card finance charges.

If you have long-term investments such as in equity mutual funds, stocks, PPF etc., you can use that to pay off credit card debt too. But not by redeeming them. Instead, use it as collateral to avail loan against securities. This is because the interest rates on such loans are much lower than the hefty finance charges.

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Liquidate your low-yield investments

The finance charges of unpaid credit card balances are way higher than interest rates applicable on fixed income products like bank fixed deposits, debt mutual funds, bonds, etc. That is why, a person reeling under credit card debt can save more money by redeeming such low-yield investments for paying off unpaid credit card balances. However, while doing so, do not touch the ones earmarked for emergency funds or short-term goals.

Healthy Habits Credit Card Users Should Adopt

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1. Always pay your credit card bills on time and in full

2. Understand the ¡®real cost¡¯ of availing no cost EMIs

3. Control the impulsive urge to purchase despite enticing offers

4. Plan transactions according to interest-free period

5. Use credit cards to also build a good credit score

6. Keep track of reward points¡¯ expiry to avoid missing out on the redemption benefits

7. Don't shy away from increasing your credit limit

Click here to understand these in detail.

Also Read; 5 Rights You Must Know As A Loan Defaulter

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