Rising credit card defaults a wake-up call for cardholders to pay their bills on time: TransUnion Cibil

News of credit card tie-ups between famous banks and E-commerce giants came to the fore with the most recent launch of a new co-branded credit card between Swiggy and HDFC Bank. The credit card will be hosted on Mastercard’s payment network and would provide cardholders rewards and benefits across various online platforms, including Swiggy. Apart, credit card users will be able to unlock a wide range of benefits including a 10 per cent cashback on Swiggy spends across food delivery, quick commerce grocery delivery, dining out, and more.

The introduction of credit cards with new benefits and innovative schemes brings forth the increasing dependence of society on credit. “Buy Now, Pay Later” seems to be the norm as more people apply for credit cards from banks and various fintech organizations. While this side of the story highlights the growth in the credit sector and an increasing aptitude among people to pay using credit cards, numbers also reveal the burgeoning credit card debt and the toll it takes on one’s finances in the long run.

TransUnion CIBIL recently launched the report titled “Credit Market Indicator” which highlights the rate of serious delinquency in credit cards, characterized by payments overdue for more than 90 days, that surged by 66 basis points year-on-year, reaching 2.94 per cent during the quarter ending June 2023.

What causes credit default?

There can be so many reasons for credit card defaults, the most common being buying on credit beyond repaying ability, job loss, sudden business downturns, or the effect of inflation on daily expenses.

The rising popularity of digital e-commerce and the increase in online transactions have made shopping and borrowing more accessible for customers. However, this convenience has led many to overspend without careful consideration of their financial situation, leaving them with insufficient funds to clear their credit card bills.

Grappling with credit card debt is a reality for many people as they try to come to terms with the debt they have incurred. The intent to get rid of this ever-increasing debt due to penalties and interest due has caused many to apply for personal loans. Personal loans are cheaper, which is another reason why many people consolidate all their credit card debts to repay them using one personal loan.

How to get rid of credit card debt?

Having unwanted debt can be a serious impediment to achieving your financial goals in the long run. First things first, prioritize your debt repayment before you move on to take another loan or plan your investment portfolio. The compounding effect on investment returns is palpable in loans too as the interest and penalty, if not paid, compound into a huge, unsurmountable figure.

Individuals can expedite their debt reduction and enhance their financial stability by prioritizing loan repayments and concentrating on paying off their highest-interest loans first. This approach allows them to reduce their debt more rapidly and effectively.

Another way can be to transfer the outstanding balance on your credit card to a card with a higher credit limit. By enabling individuals to consolidate their debts, this approach can offer some relief and help them manage their repayments in a more efficient manner.

The most common way out is to repay the loan through simple equated monthly instalments (EMIs). This serves best those who are unable to get rid of the entire loan amount in one go. This method makes credit card bill payments more manageable by allowing individuals to make smaller payments over time. This can help to alleviate the burden of the entire credit card bill, making it easier to pay off.

Heavy impact on credit score

Getting relieved of credit card debt is essential to ensure a high credit score. Not many cardholders realize how missing out on their regular repayments can impact their credit scores adversely.

Missing a couple of credit card payments may not significantly impact your credit score, but consistent defaulting can severely damage your creditworthiness. Your credit score, used by lenders to evaluate your credit risk, is influenced by factors such as payment history, debt amount, and credit history length.

Whenever you miss a credit card payment, it gets reported to credit bureaus, resulting in a lower credit score. The longer you delay making a payment, the greater the negative impact on your credit score. If you default on your credit card, failing to make a payment for at least 90 days, it will further worsen your credit score, making it challenging to obtain future loans.

To safeguard your credit, it's crucial to make all credit card payments on time. If you face difficulties, contact your credit card company to discuss potential payment plans. Additionally, reducing your overall debt load can improve your credit score and enhance your loan eligibility in the future.