Understanding credit card debt and how to avoid it

Credit Card adoption has been rising in India in recent years primarily due to two factors. Firstly, the economy has grown, and consumers are spending more due to the declining inflation rate and improving outlook for the future- a shift that could be long-term in nature. Secondly, Banks and other financial institutions are targeting individual consumers aggressively, as credit remains slow, and there are still large piles of bad loans over in the Indian banking sector.

These changes led to a record-high 77 million active credit cards in India in 2022, but this is just a fraction of the working population in India. According to data from the Reserve Bank of India, credit card loans accounted for a significant portion of total personal loan growth in September 2022 - increasing from Rs. 1.31 lakh crore to Rs 1.70 lakh crore year-over-year. But as credit card adoption is rising, so is the debt. Credit card debt is 'bad debt' because of the high-interest rates and high possibility of loan repayment failure.

Rising credit card debt in India can be attributed to a variety of factors. One major factor is the increasing availability of credit cards, and the rise in consumer spending and borrowing. Another factor is the lack of financial literacy and the ease of acquiring credit cards, with little verification of creditworthiness. Lastly, with the emergence of online shopping, e-commerce and digital payments, credit card usage has become more convenient, leading to more people relying on credit cards to make purchases.

But there are some mantras using which you can avoid Credit card debt:

1. Set a budget

Before using a credit card, set a budget for your expenses and stick to it. This will help you avoid overspending and keep your credit card debt under control.

2. Pay off balances in full

Always try to pay off the entire balance on your credit card every month. This will help you avoid interest charges and keep your credit card debt at bay.

3. Use credit cards wisely

Only use credit cards for necessary expenses and avoid using them for impulse purchases. This will help you avoid unnecessary debt.

4. Limit the number of credit cards

Having too many credit cards can lead to overspending and increase the chances of credit card debt. Limit the number of credit cards you have to a manageable amount.

5. Be aware of interest rates

Always be aware of the interest rates on your credit cards and choose cards with lower rates to avoid high-interest charges.

6. Use cashback and rewards

Take advantage of cashback and rewards programs offered by credit card companies. This will help you save money and avoid credit card debt.

7. Avoid cash advances

Cash advances are a quick way to get cash, but they come with high-interest rates and fees. Avoid using cash advances as much as possible to avoid credit card debt.