Your habits with money have an impact on the economy. You are saving less every year and borrowing even more. There is a decline in the net household savings rate to gross domestic product in 2022-23 to 5.3% of GDP. That is down from 7.3% in the year-ago period. At the same time, your intense borrowing through unsecured personal loans led to the Reserve Bank of India clamping down on it in November 2023. The RBI observed an eventual decline in unsecured personal loan growth. Even then, the overall personal loan growth stood at 18.1% in February 2024, marginally lower than the previous months.
A primary driver of personal loans is your credit card. They continue to attract new borrowers. The total outstanding loans on credit cards continue to grow at over 30%. Since credit cards are a part of the payment system, there has been a substantial increase in usage due to their ease of use. In February 2024, credit card transaction volume grew by 34% and value by 25.7%. The number of outstanding credit cards in banks surpassed the ten-crore mark. According to media reports, the total number of credit cards held globally is 125 crore in 2023.
The unified payment interface or UPI-enabled payment systems have facilitated credit card use. Using your credit card with a QR code and making payments is now easy. That means you are borrowing money for even small payments. The other important aspect is that banks know much about you today due to your digital footprint. Making timely credit card bill payments allows you to build a positive credit history. Banks are always happy if their customers borrow money, which could eventually attract a higher interest rate. If you do not fully pay your credit cards, you are paying an interest rate of 40% to 50% on the outstanding balance. Banks love such customers who roll over credit and pay them more interest.
A survey among credit card users by Anq, a financial platform, found that one in every five credit card users has more than four or five credit cards. Nearly two-thirds of the respondents chose credit cards based on the reward programmes. Besides that, banks run a referral programme too. They reward you for recommending a friend.
Credit cards are high-cost loans. There is a convenience of a 45-day interest-free period. However, if you do not pay the bills on time, it can result in high-cost debt. Ideally, the money that you borrow should be used for asset creation. So, you can borrow to buy a house or a commercial property. The interest rate on a home loan is the cheapest. It is the highest on a credit card bill. All personal loans attached to your credit card also attract a higher interest rate than personal loans linked to an asset like a house, land, or gold.
If you are running high credit card bills, you must stop that now. Take a personal loan on your credit card or a top-up loan on your existing home loan. You can pay off your credit card bills. So, if you are regular in your repayments, the top-up loan is an excellent way to raise money for significant expenses.
Managing expenses
Your credit cards offer convenience in payment.You should treat it as a short-term solution. Ultimately, you must ensure that your expenses are within your means. Your long-term retirement goals must be your first choice of payment and not credit card bills. You will borrow money regularly if you do not curb your enthusiasm to shop or manage your expenses well. When you keep servicing multiple loans, you barely create wealth for yourself. You must have an appropriate sense of spending on high-cost loans. Borrow on a credit card only when you have adequate income receivable. That applies to both the salaried and non-salaried people. You can use your credit cards, collect rewards or points, and pay your bills quickly.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)