The internet combined with the mobile phone to change the way digital payments were made around the world over the last few years. Of course, India is still at an early stage of adoption as compared to few other countries in the world – but still stands as one of the fastest growing markets in the world. The most encouraging aspect of this is the quick pace at which the payment card industry has been accepted.
Online payments have been in our ecosystem for just a few years now, yet has been so widely accepted. Such is the adoption strength and growth in India. When it does boil down to the adoption of new technologies though, India has the option to try with multiple options and usually, there is just one winner – the one that produces the best customer experience.
One quick look at the growing numbers and you are sure of the kind of digital transactions that are being carried out today. This also includes the growth from the e-commerce business (Cash on Delivery included), which was expected to be the biggest grosser at the dawn of e-commerce in India. We also have to acknowledge that the industry gets a lot of encouragement from RBI, keeping the consumer always at the top of the priority list.
All of this has led to India having its highest ever the number of credit card holders. Be it for your regular expenses, shopping, holidays or just night outs over the weekend – the credit card cycle has come upon us. A TransUnion report in Q3 states a total of 3.69 Crore credit card accounts with an average balance of Rs 46,000. This is 31.7% & 8.1% higher respectively over the last year. The most eye-catching stat in this report though was that there is an outstanding balance of Rs 84,400 Crore (Q3 2018), a 35.8% jump since the last year.
Truth be told, we can look at it as a worrying stat. Along with these growing numbers, even the delinquencies have shot up, which means that delayed payments are on the rise, adding to interest on the consumer. Debt management is still a very rough course to learn and with majority of the credit card holders being from the Gen – X & millennial age, it might not be that easy.
Keep in mind that credit cards are the most expensive forms of credit today. You are charged at 3% a month or 36% annually and that can go upto 50% depending on your repayment pattern. That is a loan percentage that you want to stay away from. So, what are the risks that are leading to a higher default rate in today’s market?
The Urge to Splurge
Unless you’ve been living under a rock, there is no way you have not been bombarded with promotional messages citing reward points, cashback offers, discounts and a plethora of data points pushing you to spend online. The entire ‘offer’ market does make us purchase more than that we need, and sometimes, more than what we can afford or repay. Minor purchases add up to a hefty amount at the end of the month and before you know it, you are defaulting at the payment date.
So, how can you stop this? The simplest way would be to keep a check always on your un-billed credit line. Keep a track of what you can pay up and stick within that budget. Practise to keep your credit card usage always at 40% at maximum of your salary, keeping it easy to repay at the start of the next month.
Partial payments don’t really help
Many of the users just don’t restrict their usage of credit cards and that leads to a large amount being due at the end of the month. The minimum amount due is what they find most feasible to pay back and that just does not help the cause. Just to put it in perspective, an outstanding of Rs 50,000 would take close to 9 years to cover if you’re just paying the minimum amount due. 9 Years. That is not an encouraging figure. The entire payment card industry is worked around the interest that you pay, it is bound to be interest rates that are high and a default can cripple your spending ahead.
First off, your credit score gets damaged if you are not paying on time and this might effect you when you are thinking of taking a loan or so. If remembering the payment date is the problem – give your bank a standing instruction for auto debit.
Extra charges on the unpaid bills
You would end up paying 36-50% PA on repayment and if you do not pay the minimum amount due (5% of the bill amount), you are going to attract a late payment fee fo Rs 1,000. Moreover, the moment you do not pay the entire bill amount, any new transaction is going to come with the additional finance charges. How can you avoid this? Simple. Just do not overspend.
No free cards
Also, we fall into the trap of ‘free credit cards’. Most of these cards are chargeable after the first year or have certain conditions or targets to reach till your fee is waived off. So, in most cases – just to avoid that add on fee, we splurge to meet that target number.
Be it the spending spree or the urge to splurge, defaulting on a credit card can cause massive problems in your financial life. The impact can be for years and can seriously damage your future plans. The simplest and best way to keep this in check would be to track your spends at all times and to ensure you are spending the right amount of your incoming funds each month; thereby enabling you to reach the finish line comfortably each payment due date.