Credit card defaults are on the rise in India, indicating that more people are struggling to manage their debts. According to recent data from TransUnion CIBIL, the percentage of credit card defaults increased from 1.6% in March, 2023 to 1.8% by June, 2024. Although this may seem like a small increase, the overall amount of outstanding dues has grown significantly, showing the financial strain on cardholders.

With the total outstanding credit card debt now reaching Rs 2.7 lakh crore, it’s clear that many people are either overusing their credit or are unable to repay on time. If you have a credit card, it’s important to understand the potential consequences of falling behind on payments but first let’s start with understanding credit card defaults.

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What are Credit Card Defaults?

Credit card defaults occur when a borrower consistently misses payments. Usually, this starts with one or more minimum payments being missed, which results in fines and increased interest rates. Over time, the accumulation of unpaid dues results in a default, in which the borrower’s account is marked as overdue by the bank.

Let us understand this with an example –

Assume Rahul, a young millennial, used his credit card for everyday purchases, even buying an iPhone on EMI. Eventually, his dues piled up, and he could only manage the minimum payment. Over time, the interest snowballed, and Rahul could not repay the full amount.

To make matters worse, he took a personal loan to clear his credit card debt, replacing one debt with another. Rahul’s story mirrors the struggles of many borrowers who fall into the ‘minimum due’ debt trap.

After Rahul’s example, it’s easy to see how credit card defaults can happen when small payments are missed. Many young people today are getting trapped in this cycle by using options like EMIs and Buy Now Pay Later (BNPL). They start off thinking they can handle it, but over time, the interest grows, and paying off the debt becomes hard.

E-commerce sites are making it easier to spend with these schemes, which is why more people, especially millennials and Gen Z, are facing issues with their credit card payments and have to suffer with certain consequences.

Consequences of Credit Card Defaults?

Impact on Credit Score

Missing payments negatively affects your credit score. A low credit score makes it difficult to get loans or new credit cards in the future and could lead to higher interest rates.

Late Fees and High Interest

If you miss your credit card payment deadline, the bank will charge late fees and add high interest on the remaining balance. Interest rates can range from 2.5% to 3.5% per month, quickly increasing your debt and making it harder to repay.

Credit Limit Reduction

If you default on credit card payments, banks may reduce your credit limit. This makes borrowing harder and increases your credit utilization, further damaging your credit score.

Also Read: New Perks & Fees for American Express Platinum Card: What to Expect in October, 2024?

Legal Action

If you continue to ignore your payments, banks may take legal action to recover the outstanding amount. They could file a civil suit and, in extreme cases, initiate a criminal case.

Debt Collection Hassles

Banks may hire debt collection agencies to recover unpaid dues. These agencies can contact you frequently, and in some cases, visit your home or workplace, causing embarrassment and stress. Hence, to avoid these consequences, it’s important to stay on top of your credit card payments and avoid over-borrowing.

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