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Credit cards have become more than just a convenient payment method; They have evolved into a means of financial freedom and accessibility. However, for many people, like 25-year-old Rohan (name changed), the lure of credit cards has led them down a dangerous path of debt and financial hardship.
When Rohan got a credit card, little did he know that it would lead to an endless cycle of EMI payments. What started with Rohan fulfilling his aspirations – buying a TV, a laptop and a smartphone – quickly turned into a nightmare of mounting debts and constant struggles.
“I got a credit card mainly to buy some electronic items like a TV, laptop and phone,” Rohan confessed. “Since many online shopping sites were offering interest-free EMIs and you could also earn rewards and cashback, it seemed like a smart thing to do.”
“I have not been able to fully pay off my outstanding credit card balance and have been paying only the minimum amount for the past few months,” he said.
Like Rohan, millions of Indians have become addicted to credit cards and are fighting a constant battle to avoid defaulting on their EMIs.
Credit card spending has skyrocketed to alarming levels in India, as have defaults.
This comes at a time when getting a credit card has become easier than ever, and banks and financial institutions are aggressively promoting their offers to consumers across the country.
For many, purchasing power ends in a nightmare, and some even opt for personal loans to pay off credit card debt.
THE CREDIT CARD BOOM IN INDIA
India has adopted credit cards at an astonishing rate.
Just a decade ago, credit cards were a rarity, with strict eligibility criteria and low levels of financial inclusion hindering their widespread adoption.
Reserve Bank of India (RBI) data shows that there were less than 2 crore (1,76,72,337) active credit cards in India in December 2011 and the figure rose to just over 2 million of rupees (2,03,62,859). at the end of 2014. A slight increase in three years.
The number of active credit cards in India did not exceed 3 crore in the next two years. At the end of 2018, the number of active cards was 4.4 cores.
Although the number of credit cards in 2018 more than doubled compared to 2011, it was nothing compared to the boom seen between 2019 and 2023.
During this period, there has been a significant increase in the number of active credit cards in the country – from 5.5 crore (5,53,32,847) in December 2019 to nearly 10 crore (9,95,00,257) in January of 2024. .
This represents an 81% increase in the number of active credit cards in the country.
In 2023 alone, more than 1.6 million credit cards were issued, compared to 1.2 million credit cards added a year earlier.
TO report prepared by PWC in 2022 highlighted that the credit card industry in India had witnessed a compound annual growth rate (CAGR) of 20% in the last five years.
He also highlighted that in May 2022, just at the time when the Indian economy was recovering from the Covid-19 pandemic, the overall spending on credit cards reached its all-time high of Rs 1.3 lakh crore.
So, along with the number of credit cards issued, spending through them also increased.
Credit card spending hit a new record in October 2023, when it reached Rs 1.72 lakh crore.
And in the last three months, Indians have spent nearly Rs 5 lakh crore through credit cards, almost 2% of India’s total GDP.
This also indicates that the average loan amount through credit cards has increased significantly.
While the post-Covid spending frenzy has given a significant boost to credit card adoption and spending, there are bigger factors at play. The PWC report suggested that with the emergence of e-commerce, the adoption of contactless payments and changes in the value proposition, the post-pandemic credit card space has undergone considerable change and is constantly evolving.
He noted that credit card adoption could grow at almost three times the speed in the next four years.
DEFAULT OF CREDIT CARD DEFAULTS IN INDIA
With greater adoption of credit cards and increased spending, defaults are also increasing.
In 2022-23, credit card defaults amounted to Rs 4,072 crore, which was over Rs 950 crore more than the default of Rs 3,122 crore in 2021-22.
It’s alarming The trend has also attracted the attention of the Reserve Bank.. Days after credit card spending hit a record high in October 2023, RBI Governor Shaktikanta Das said he was monitoring some components of personal or unsecured loans to identify strains.
“However, some components of personal loans are registering very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress,” Shaktikanta Das said.
His comment came amid a period in which banks were expanding their unsecured loan portfolios, particularly in response to rising credit card spending.
Despite the RBI’s warning and efforts to curb unsecured lending, the bulk of credit card loans extended by banks have been to relatively riskier borrowers.
RBI economists in analysis on retail credit flows He highlighted that in November 2023, the banks’ outstanding credit card balance increased by 34% compared to the previous year. It rose to Rs 2.4 lakh crore, accounting for 5% of total retail loans.
“In the case of credit cards, the credit outstanding per living borrower is higher for low-quality borrowers, suggesting greater flow of credit to relatively riskier borrowers,” RBI economists wrote in the research paper entitled “Credit Growth Dynamics in the Retail Segment: Risk and Stability Concerns.”
Nilesh Tribhuvann, founder and managing partner of White & Brief, Advocates & Solicitors, said the increase in exposure to credit cards underlines the evolution of consumer behavior after the Covid-19 pandemic.
“Despite RBI’s risk weight adjustments on unsecured loans, credit card issuance is nearing the million milestone and is at Rs 9.95 crore. HDFC Bank, with more than two million cards, maintains its leadership among issuers. “As legal advisors, we closely monitor this trend, recognizing the delicate balance between increased spending and potential non-compliance risks,” he added.
THE ‘MINIMUM MATURITY’ CREDIT CARD DEBT TRAP
While there is a rise in credit card defaulters, it is only a fraction compared to people who are stuck in an endless loop of monthly payments, just like 25-year-old Rohan.
“I think credit cards and online shopping can be a dangerous combination if used irresponsibly as it can lead to a debt trap,” Rohan told IndiaToday.In.
“Debt can accumulate quickly and become unmanageable. That is why I am always careful with the use of my credit card,” he added.
Most people who shop with credit cards are usually attracted by lucrative offers like no-cost or low-cost EMI, which apply to almost all products online and even in physical stores.
These offers lead to many impulse purchases and the outstanding balance continues to grow. The worst thing is that after a period of time, the interest rate on the amount owed continues to increase.
TAKE A PERSONAL LOAN TO CLEAR CREDIT CARD FEES
And when people choose to pay the ‘minimum balance due’ instead of the total due for the month, they fall deeper into a debt trap, resulting in defaults, low credit scores, and even harassment.
This is what happened to Sohom (name changed) when he got his first credit card.
“This was after I passed out of college and went to work in Mumbai. Living in the megacity was difficult with my meager income. They offered me a credit card along with the new salary account,” he told IndiaToday.in.
Soham used his credit card to finance gym expenses and even bought a new iPhone. “I used my credit card with a limit of Rs 1.5 lakh. As expenses grew, so did my debts to the bank. Most months I paid only the minimum amount due,” he added.
But as the payment burden grew, he began missing payments.
“The bank started making calls and the pressure increased. It was my mistake. It’s a temptation. Before things got out of control, I requested a personal loan from the same bank to settle what was pending,” she recalled.
Soham’s decision to take out a personal loan to pay off his credit card debt, while an extreme step, makes sense when comparing interest rates.
Typically, personal loan interest rates range from 10.5% to 44%, depending on factors such as the borrower’s credit history, borrowing history, loan amount, and income.
However, problems are compounded in the case of credit cards when people do not pay the full amount due monthly or default on payments.
While the average interest rate on most credit cards ranges between 3.6% and 4%, this only applies when people pay off their monthly installments in full. If a credit card user pays nothing or chooses to pay the minimum amount due, banks charge interest daily on the outstanding balance. This is why people who pay minimal installments often see their outstanding balance increase over the following month or remain almost stagnant.
Soham faced a similar situation with another credit card he used to have. Luckily for him, he managed to borrow money from a friend and pay the installments.
There are countless examples of people regretting their decision to pay minimum installments on their credit card expenses.
Arijit (name changed) told IndiaToday.in that he also continued to pay a little more than the monthly minimum due for some time, after which the outstanding amount jumped to nearly Rs 85,000.
“I continued paying only the minimum fee or a little more. I kept doing that for a while. It seemed as if the amount had accumulated overnight,” she said.
As India grapples with its growing credit card culture, stories like those of Rohan, Sohom and Arijit highlight the risks involved. While credit cards offer convenience, they can easily lead to a debt trap.
(With contributions from Sushim Mukul)