India's credit card losses spike for millennials’ swipe-spend-default!

India's credit card losses spike for millennials’ swipe-spend-default habit!!

Credit card outstanding dues have risen significantly, with net credit losses reported at 5-6%. The RBI's measures to curb unsecured loans are showing results, slowing down credit growth in these segments.

"Young millennials are using the entire limit and directly defaulting and turning into an NPA without even revolving the loan," Suresh Ganapathy, research analyst with Macquarie, has said. He noted that net credit losses in credit cards are running at closer to 5-6%, with SBI Cards reporting 7.5% net credit losses last quarter.

"Most of the payments transactions on Amazons of the world are through credit cards. Now we have BNPL, which is catching up. Also, there are EMI schemes which are popular among card users. All this is allowing card users to buy more and repay through instalments," V Balasubramanian, CEO of Financial Software and Systems, a payments' technology provider, had told ET in January. "This is typical of any country that is moving from a savings economy to a credit or a consumption economy. The younger

generation owns a bigger pie of the credit card ownership as well as spends. They are active buyers on ecommerce platforms."

What is the punishment for credit card default?

Credit card defaults: The amount of credit card payments that are overdue has been consistently rising, suggesting that borrowers are encountering greater financial challenges. TransUnion Cibil data shows that credit card defaults increased to 1.8% in June 2024 from 1.7% six months prior and 1.6% in March 2023. Despite the seemingly small percentage increase, the overall sum of unpaid credit card balances has notably expanded.

Rising credit card defaults

In June 2024, the outstanding amount on credit cards was nearly Rs 2.7 lakh crore, up from Rs 2.6 lakh crore in March 2024 and just over Rs 2 lakh crore in March 2023. Prior to the pandemic, in March 2019, the total outstanding amount was Rs 87,686 crore, indicating a 24% compound annual growth rate over the five years.

"The borrower's default journey begins with making a large purchase with the idea that they will repay it in instalments. But this outstanding get amortized at a rate as high as 48% annually, and the borrower reaches a stage where he can make only the minimum payment," Ritesh Srivastava, founder and CEO of debt relief platform Freed, told Times of India. "What we have seen is that the borrower, to make the minimum card payment, gets into loan-stacking by taking small-ticket personal loans," he added.

When you fail to repay the minimum amount due on your credit card bill for several months, then it is called a credit card payment default. Your credit card account will first become delinquent if you fail to make a payment for 30 days. If you continue to remain delinquent for six months, without making any minimum payments, your account will then enter into default. Your bank will contact you to understand your situation when you are delinquent on your payments to understand your repayment strategy .

If you do not pay even after this, your account is closed and a no-payment report is sent to the credit bureaus. This affects your credit score negatively which will make it difficult to take a loan or get a new credit card in the future."

Information Credit: Economic Times.

Consequences of a credit card default

When you fail to repay the minimum amount due on your credit card bill for several months, then it is called a credit card payment default. Your credit card account will first become delinquent if you fail to make a payment for 30 days. If you continue to remain delinquent for six months, without making any minimum payments, your account will then enter into default. Your bank will contact you to understand your situation when are delinquent on your payments to understand your repayment strategy. If you do not pay even after this, your account is closed and a no-payment report is sent to the credit bureaus. This affects your credit score negatively, which will make it difficult to take a loan or get a new credit card in the future.

For this reason, make sure you always pay off the balance on your credit card debt on time. Paying off credit card debt on a regular basis should be your top priority.

5 consequences of defaulting on your credit card payment

Here is a look at what happens if you default on your credit card default, as per the Kotak Mahindra Bank website.

• Late Payment Fees and Interest Charges

If you fail to pay your credit card bill on or before the due date, you will be charged a late payment fee by the bank. In addition to this, the bank will also charge you interest on the outstanding balance. The interest rate can range from 2.5% to 3.5% per month, which can add up to a significant amount over time.

• Negative Impact on Credit Score

A credit score determines your creditworthiness. It is calculated based on your credit history, including your credit card payments. When you default on your credit card payment, it can have a negative impact on your credit score. This can make it difficult for you to get loans or credit cards in the future. A low credit score may also result in higher interest rates and lower credit limits.

• Legal Action

Your bank may take legal action against you if you fail to pay your credit card bill for an extended period. The bank can file a civil suit against you for recovery of the outstanding amount. In extreme cases, the bank may also file a criminal case against you for fraud. This can result in legal expenses and a tarnished reputation.

• Debt Collection Agencies

If you don't make your credit card payment on time, the bank may work with a debt collection agency to get the money back. Debt collection companies may contact you aggressively and harass you with calls and letters. They might even pay you a visit at your place of business or residence. If they visit your office, this may be embarrassing and cause tension and anxiety.

• Decreased Credit Limit

When you default on a credit card payment, you appear as a high-risk borrower to others. To reduce their own risk, they may limit the amount of credit available to them. This can lead to a decrease in credit limits on your other credit cards. As a result, your credit utilisation rate may increase, which can negatively impact your credit score and invite further complications.