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SBI report on rising online credit card usage: How to avoid a debt trap

A recent report from State Bank of India suggests a massive rise in online credit card usage. If used carelessly, credit cards can wreck your finances

December 15, 2020 / 10:14 AM IST

A research report put out by State Bank of India’s (SBI) on December 8 says that digital transactions using the United Payment Interface (UPI) have risen 1.8 times the pre-COVID-19 levels. During October-November 2020, the National Payments Corporation of India (NPCI) processed more than 200 crore UPI transactions worth Rs 3.9 lakh crore in each of the two months.

Consumers have increasingly taken to paying their utility bills online. Aside from an unusual drop in April 2020 just after the pandemic started and lockdowns were declared, there has been a surge in credit and debit cards usage for digital payments from May onwards.

Credit cards offer convenience. But if used carelessly, they can wreck your finances. If you’ve taken to using credit cards big time this year, then here’s what you need to know.

Credit cards are the most expensive forms of debt

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Did you know that credit card dues are the most expensive debt? Personal loans are available for about 16-18 percent. Home loans are now offered at 7-8 percent. But if you do not pay your credit card bills on time, you end up paying 35-40 percent annual interest. And even if you pay the minimum balance, you have to pay the interest on the entire amount unpaid.

The SBI report says that consumers are spending more amounts via their credit cards than on their debit cards – Rs 8,712 on an average in September on credit cards, as opposed to Rs 868 on debit cards.

Also read: Credit card usage | How to teach your child prudence in money matters

Aman Kapoor, chief engagement officer at Credit Sudhaar says, “Generally the card outstanding gets charged at about three percent a month which turns out to be 36 percent on an annualised basis. However, the effective interest that a customer will pay is far higher and can be as high as 48-50 percent, depending upon the repayment pattern.”

Is your income absolutely secure?

That’s the question most of us must ask ourselves these days. Many job losses have happened in these COVID-19 times and incomes for many others have also fallen. A credit card can be a risky instrument for those who cannot refrain from splurging money.

And there are offers galore to lure the unsuspecting shopper; reward points, cashback offers and discounts. Sahil Arora, Director of Paisabazaar.com says, “The best to way to avoid overspending is to keep track of unbilled balances on your credit card and spend only the amount that can be repaid by the bill due date.”

The debt on your credit card can grow swiftly

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 says, “So, if one was to calculate an outstanding amount of Rs 50,000 on a credit card, it will take almost nine years to get repaid if the card holder was paying only the minimum amount due every month.”

To avoid such a situation it’s better not to revolve the credit card. This practice leads you to a debt trap.

Credit score gets affected due to a higher utilisation ratio

Do you regularly exhaust your credit card limit? Check your credit utilisation ratio: how much you spend vis-à-vis your credit limit. A higher ratio can adversely affect your credit score. Experts say that a ratio of over 40 per cent is typically the upper limit you shouldn’t cross. For instance, if you have a credit limit of Rs 1 lakh on your credit card, then your spends shouldn’t ideally exceed Rs 40,000.

Also read: Why your credit score differs across bureaus

“Those who exceed 40 per cent of their credit limit frequently should request their card issuers to increase their credit limit based on their eligibility,” says Abhishek Agarwal, CEO and Co-Founder of CreditVidya. This will increase your total credit limit and, hence, reduce the credit utilisation ratio.
Hiral Thanawala
first published: Dec 15, 2020 10:13 am

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