With Credit Card defaults in India rising to Rs 4,000 crore, Here’s how you can avoid it

India’s credit card defaults have been rising significantly and as per the latest reports, India’s credit card defaults have crossed the Rs 4,000 crore mark. The default has grown by almost Rs 951 crore from Rs 3,122 crore in FY2021-2022 to Rs 4,073 crore in FY 2022-2023, according to data obtained from RBI under the Right to Information Act.

The RBI has raised concerns over the rise in unsecured lending. 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

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. In addition to the heavy financial charges and penalties, this defaults also hurt your credit score.

The most important question that might now come in your mind would be, ‘How can I avoid the credit card debit trap and what should I do?’ well, do not worry because we will tell you a few tricks and tips you can use.

1) Banks and other credit card issuers mostly allow the conversion of existing card outstanding into EMIs. They also allow their cardholders to convert specific big-ticket transactions into EMIs. This is particularly useful as the interest rates of EMIs are significantly less than that of credit cards.

2) Credit card balance transfer allows the cardholder to transfer the outstanding balances of their existing credit card/cards 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. 

3) Another trick you can use is that instead of using a credit card, you can opt for a low cost loan to repay your ccard dues as interest rates of personal loans, gold loans, etc is less compared to credit card interest rate. If you have long-term investments such as in equity mutual funds, stocks, PPF, etc., you can use that to pay off debt too. But not by redeeming them. Instead, use it as collateral to avail loan against securities.

4) 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 card debt can save more money by redeeming such low-yield investments for paying off unpaid card balances. However, at the same time it is advisable to not touch the funds you might have saved up for emergencies.

While you now know what not to do, here are some healthy habits that people with cards should use:

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 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

Please, also have a look into : Indian Bank and OneCard collaborate to develop mobile-first credit cards