Credit card

Borrowing: Swiping your credit card? Think again

Reckless credit card purchases, late payments, and credit deferral can lead to a debt trap. And unpaid dues can affect your credit score

After the Covid-19 pandemic, credit cards have become one of the most popular digital payment methods. The growing use of credit cards suggests consumer demand for innovative financing options and credit constructions in an increasingly digital ecosystem. For most banks, the card issuance process is digital end-to-end, with video verification to speed up the know-your-customer (KYC) process.

The credit card to debit card ratio, a key indicator of increased credit card acceptance, rose to 7.5% in January this year from 6.9% in the same month last year last, and the credit/debit card spending ratio increased to 1.5x. in January this year versus 1x in January last year, according to data from an analysis by Axis Securities.

For the current financial year to January, credit card spending registered a 57% year-on-year growth to reach 7.81 trillion rupees from 4.98 trillion rupees in the of the same period in 2020-21. The increase in card spending is due to increased discretionary purchases, a resumption of domestic travel and the gradual reopening of international travel.

Credit cards are secure and convenient to use. However, reckless spending, late payments, and renewing credit can lead to a debt trap. Long delays and unpaid credit card charges will affect your credit score, and banks might not be willing to give you an education, a vehicle, or even a home loan.

So, to avoid getting caught in the trap of credit card debt, here are four factors to keep in mind before swiping the card.

Look for a low cost card
Look for a credit card that charges lower interest rates and zero or lower annual fees. Credit card issuers charge fees such as cash advance fees, late payment fees, ECS/discarded check fees, and statement requests beyond three months, among others. Experts say credit card refunds can encourage cardholders to spend more, which can then lead to a debt trap if the individual is unable to pay the outstanding amount owed on time.

Use the card rationally
The credit limit is decided by the credit card issuer at the time the card is issued. Ideally, use credit cards for emergencies or for fixed or recurring monthly expenses. Most banks allow a credit window of 4-5 weeks from the day of the expense to the date of the billing cycle. During this particular period, credit card spending is like an interest-free loan as long as you repay the amount before the due date. Ideally, you should pay the full outstanding amount. However, if you are experiencing a cash shortage, you may pay more than the minimum amount due, which is calculated as 5% of the outstanding balance, or the sum of all installments, interest/other bank charges and the amount used on credit. limit, if any.

Avoid deferring credit
Credit report on a credit card is much more expensive than a personal loan. Banks may charge an interest rate of 3-4% per month for all deferred unpaid dues and interest is charged on your daily credit card balance. So if you’re rolling over credit, try not to use the same card for a transaction until you’ve cleared all outstanding debt. As the banks will charge interest for all transactions during this period which will compound the arrears and lead to a debt trap. Existing credit card holders should look for a low-interest card, then transfer outstanding debt from the card with a higher interest rate to one that charges less. This will reduce interest expenses and help avoid any debt traps.

Default of payment hits credit score
If you fail to pay the credit card bill on time, your credit score can take a hit. If it is impossible to pay the amount due, it is preferable to convert it into equivalent monthly installments and pay them regularly. Otherwise, take a personal loan, where the interest rate will be 15-20% per year, to pay off the credit card due. Avoid any type of debt settlement with the bank as it will affect your credit score.

living on credit
Look for a credit card that charges lower interest rates and zero or lower annual fees.
Use credit cards for emergencies or for fixed or recurring monthly expenses.
If you’re running on credit, try not to use the same card for a transaction until you’ve cleared all outstanding debt.
If you are unable to pay the outstanding amount due, convert the amount to EMI and pay them regularly.