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With the latest findings from TransUnion CIBIL Industry Insights Report (TransUnion), it seems Indian consumers have become aggressive with the use of credit cards in routine life. The consumers have developed an appetite for shopping, booking for holidays and borrowing by swiping a credit card. This is because TransUnion report indicate that credit card usage has hit an all-time high.
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As per TransUnion third quarter 2018 report, Indians have 3.69 crore credit card accounts, outstanding balance of Rs 84,400 crore and the average balance per credit card holder was Rs 46,000. Those totals represent increases of 31.7 percent, 35.8 percent and 8.1 percent respectively, over third quarter 2017 figures.
Yogendra Singh, Vice President of Research and Consulting for TransUnion CIBIL said, “The Millennial (those who are born between 1980 and 1994) and Generation X (those who are born between 1965 and 1979) consumers are driving much of this growth and comprise well over half of all accounts and balances.”
It’s not just the number of credit cards that have gone up. The report adds that delinquencies – or the number of credit card holders carrying forward a balance have also gone up. Delinquencies have risen in this period (this is defined as amounts that are due for 90 or more days). It is 1.78 percent for the third quarter, up 28 basis points against third quarter of 2017.
Singh said, “From a consumer perspective, it’s immensely important that borrowers understand the importance of continuing to make on-time payments. This is especially important for younger consumers, who are generally less experienced in managing debt and are still building their credit habits.”
It’s important to understand using credit cards are most expensive forms of credit. Aman Kapoor chief engagement officer at Credit Sudhaar explained, “Generally the card outstanding gets charged about 3% per month which turns out to be 36% on an annualised basis. However, the effective interest that customer will pay is far higher and can go as high as 50% depending upon the repayment pattern”.
Despite their numerous benefits with rising usage, it’s important to know credit cards can even pose significant risks for those lacking financial disciple. If used carelessly, they can wreck your financial health for a long time and reduce your eligibility for any type of loans. Let’s look at major risks of using credit card and how you can avoid it.
Risk of overspending
Using credit card can be risky instrument for those who cannot refrain themselves from splurging money. The easy availability of credit along with exciting reward points, cashback offers and discounts often entices you to prepone expenditures and buy products which you can do without. This may lead you to spend more than what you can repay.
How to avoid it? Sahil Arora, Head of Payment Products at Paisabazaar.com said, “The best to way to avoid overspending is to keep track of unbilled balances on your credit card and spend only that can be repaid by the bill due date.”
Debt grows at electrifying speed
Generally the credit card holders are unable to restrict the usage of cards and this leads to a large amount reflecting as due on the monthly statements. This leads to revolving the credit and making partial payments by credit card holder. Kapoor explained, “So, if one was to calculate an outstanding amount of Rs 50,000 on credit card it will take almost 9 years to get repaid if the card holder was paying only minimum amount due every month”.
How to avoid it? Not revolving the credit will be the key to effective management of the credit cards.
Credit score gets damaged if you don’t pay up on time
Credit card transactions are considered as equivalent of taking loans. Hence, credit bureaus include credit card bill defaults in the credit report and reduce credit score accordingly.
How to avoid it? Arora suggested, “Those having a tendency to forget their bill due dates can set standing instructions in their bank account to enable automatic bill payment”.
Impacts credit score due to higher credit utilisation ratio
This ratio denotes the proportion of your total available credit limit availed by the cardholder. Credit bureaus consider credit utilisation ratio of over 40% as a sign of credit hungriness and it impacts your overall credit score. For instance, if you have a credit limit of Rs 1 lakh on your credit card you shouldn’t ideally exceed Rs 40,000 frequently on credit expenses.
How to avoid it? Abhishek Agarwal, CEO and Co-Founder of CreditVidya said, “Those who exceed 40% of their credit limit frequently should request their card issuers to increase their credit limit based on eligibility.” This will increase your total credit limit and hence, reduce credit utilisation ratio.
Charges incurred on unpaid bill amount
Credit cards charge 36-50 percent p.a. (varies from type of card and bank) on the unpaid credit bill amount. Failure to repay the minimum amount due, which is usually 5 percent of the bill amount, will attract an additional late payment fee of Rs 1,000 (varies from bank to bank). Remember that once a cardholder fails to repay the entire bill amount, all fresh transactions thereon will attract finance charges till the unpaid balance is paid off.
How to avoid it? Don’t overspend it’s as simple as that.
Avoid using multiple credit cards
Often, banks are offering free credit cards targeting to the millennials who are entering the workforce or switching jobs in early age. Also, there are co-branded cards being promoted targeting generation X consumers. To get additional benefits this consumer’s end up with multiple credit cards and not using them.
Also, lot of times this free credit cards are chargeable from second year or have conditions to use card for minimum Rs 50,000 annual expenses (varies from type of card and banks). If minimum expense criteria of bank is met they will waive off annual credit card charges. So, generally you overspend using all this cards to get waive off from this credit card charges and avail additional benefits offered.
How to avoid it: Gaurav Gupta is the Founder and CEO of Myloancare.in suggested, “If you don’t need multiple credit cards then you should return back the cards to respective bank and get it cancelled.” If you leave a card just lying with you then chances are banks will levy annual charges on the card despite not using it.