The world two years ago was a nightmare for many entrepreneurs like Kirankumar Shetty whose bridge works business was hard hit. Delayed incoming payments became a financial spiral, saddling the 44-year-old with a debt of a staggering Rs 30 lakh across eight long-held credit cards. The toll was not just monetary. Emotionally, Kirankumar was isolated, cut off from social circles. His world quickly shrank to his immediate family.
“I didn’t want to meet anyone,” he recalls. “When people find out you’re in trouble, they stop taking your calls, and they start avoiding you.” The constant pressure from banks, unrelenting calls and threat of legal action loomed large, casting a shadow over the everyday lives of the Shettys. “Every rupee owed felt like a chain around my neck,” the Hubbali-based Shetty recalls.
This scenario is hardly unique to Shetty. Along with the significant rise in credit card usage as repoted by RBI in 2023, The debt grew too: by March 2023, credit card defaults rose to `4,072 crore, accounting for 1.94 per cent of total credit card debt. Outstanding credit card debt exceeded `2 lakh crore in April 2023, a notable increase of almost 30 per cent within the financial year.
With 8.6 crore cards in circulation, up 15 per cent over the previous year, these figures – the increase in credit card usage and outstanding balances – ironically point to a more robust consumer economy with greater access to credit. Encapsulated within these numbers, however, are also the everyday miseries of people like Shetty, riddled with financial challenges.
In extreme cases, credit card debt is accompanied by human tragedy. In October last year, a 23-year-old woman living and working out of a village in Gurgaon killed herself over persistent calls from a credit card company; the police had to register a case of abetment to suicide based on her farewell note. In 2019, a 35-year-old man jumped to his death with his four-year-old daughter in Delhi over unresolved debt arising from a bunch of credit cards.
SG (full name withheld on request) from Mumbai is still in credit limbo, continuing to grapple with debt that has been mounting since 2016. “Demonetisation hit me doubly – first, because I ran a cash flow-oriented business, an internet café, and the reduced cash in circulation meant fewer customers, and secondly because it was impossible for me to convert all the cash I had to new notes,” says SG.
Like Shetty, whose business was impacted by the pandemic, he had no choice but to use his credit card for daily expenses. In a year, he had run up a debt of over Rs 6 lakh. “I have been paying up as much as I can each month, but it’s impossible to keep pace with the sky-high interest,” says SG, who also had to borrow Rs 3 lakh against another card between the time he shut down his internet café in Andheri in 2017 and started earning a steady income by running a cloud kitchen in 2018.
“I was just finding my footing, and then the pandemic hit, and the rug was pulled from under my feet,” says SG, who sold his apartment in Mumbai, paid off Rs 13 lakhs of the Rs 25-odd lakhs he still owes credit card companies, and moved to Nashik in February this year.
His monthly expenses are taken care of by his maternal uncle who has found him a job in a factory, but most of whatever he earns continues to go towards paying off his debt, “and still, with the interest mounting, I don’t think I will ever be debt free,” says SG, who worries that should his aging mother require medical care, he may not be able to afford it.
There’s hope yet. Freed, a debt resolution platform founded by Ritesh Srivastava, is one of the torchbearers. “Aside from financial solutions, I am very grateful for the emotional support they provided – the assurance made a world of difference,” says Shetty who stumbled across an advertisement for the platform when he was racking his brain for solutions. Guided by the team, he started setting aside a sum every month, diligently working towards a resolution, while they negotiated his debt down from Rs 30-odd lakh to about Rs 13 lakh, carving out a significant 43.77 per cent savings.
Credit Rising
Srivastava says he established Freed in 2020 in response to the changing dynamics of consumer debt in India involving the changed attitudes of younger generations towards credit. “I had observed an increase in retail credit use, particularly among millennials and Gen Z. This trend towards aspirational spending and a lessened stigma around debt, combined with the accessibility of FinTech and NBFC loan structures, high credit card interest rates, and buy now-pay later schemes, highlighted a clear need for such a platform,” says Srivastava. Since inception, the platform, which focuses on unsecured debts like of credit cards, has, its website states, helped over 200,000 customers to manage debts totalling more than Rs 1,000 crore.
Siddharth Banwat, a Mumbai-based chartered accountant, offers insight into why people get swept away while swiping: “Unlike housing loans, where the EMIs are calculated based on one’s repayment ability, credit card limits are set based on annual salaries without accounting for expenses. This often leads people to overlook that not all their salary is expendable. This can result in consumers spending beyond their means, drawn in by high credit limits and the illusion of financial freedom.”
His point is exemplified in the case of JV, a 26-year-old graphic designer, who defaulted on his credit card debt of `35,000 two years ago. “Initially, the bank kept calling, but they stopped eventually—guess my small debt wasn't a priority given the bigger financial frauds out there,” he says, totally unperturbed. “I just changed my phone number to avoid being pestered by the banks,” he says.
He taps on his phone to pull up an email that warns of criminal consequences under the Indian Penal Code and says, “I get these from time to time, but I ignore them. Nothing really happens. I know your credit score plummets when you don’t pay off a card, but I even got another credit card with the same spending limit from a different bank,” he shrugs. This nonchalant attitude, however, overlooks the risks of spiralling into unmanageable debt and enduring long-term repercussions on his financial health.
“This is a very shortsighted approach,” warns Ratna Sharma, Executive Director, Lighthouse Canton, a global investment institution that offers wealth and asset management services. “Paying only the minimum amount due or missing payments can lead to exorbitant interest charges. This compounding of interest on new transactions along with the existing debt can rapidly escalate a small debt into a much larger amount, making it increasingly difficult to manage,” says Sharma.
She points out that the interest on overdue amounts is typically 3 per cent per month, which translates to an annual rate of 36 per cent. “Credit cards are one of the most expensive forms of debt, especially when compared to other loan options,” says Sharma. In comparison, home loans or car loans, which are secured loans, usually have interest rates between 7 and 15 per cent annually. Even unsecured personal loans generally have interest rates ranging from 12 to 25 per cent per year.
Sharma also explains that when you use a credit card, the high interest rate (36 to 48 per cent per year) is applicable not just on the portion of the balance you haven't paid but extends to all subsequent purchases until the entire debt is fully cleared.
Consider a scenario where you spend Rs 50,000 with your credit card in a month. If you pay only half of this amount by the due date, you're left with an outstanding balance of Rs 25,000. On this remaining balance, an interest rate of 36 to 48 per cent annually (or 3 to 4 per cent monthly) is levied. Consequently, for the first month after your partial payment, assuming the bank levies 3 per cent interest per month, the interest would amount to Rs 750 (plus you’d also be charged a late fee).
Now, say, for example, should you incur medical expenses in the following month, of Rs 3 lakh, the high interest rate immediately applies to this new amount as well. This means for the second month, the total balance subject to interest is Rs 3,25,000 (your previous unpaid balance plus the new expense). So, now, you’re charged a late fee plus interest for this total amount, i.e., Rs 9,750 – and that’s only in the first month.
If the total balance of Rs 3,25,000 (comprising the previous unpaid balance and the new medical expenses) remains unpaid for a year at an annual interest rate of 36 per cent, compounded monthly, the situation escalates significantly. In just one year, taking into account the compound interest, the interest on this unpaid amount would grow to approximately Rs 1,38,372.
This example illustrates the critical importance of understanding how credit card interest works. Many people mistakenly believe that they're only charged interest on amounts exceeding their card limit, which is not the case. Instead, the interest applies to all outstanding balances and new expenditures, potentially leading to a significant and rapid increase in total debt if not managed carefully. “This aspect of credit card debt is often overlooked, leading to a rapid accumulation of debt,” says Sharma.
Delicate Balance
Sharma believes that while India has traditionally been a nation that emphasises savings over borrowing, the increasing use of credit cards is a trend that warrants attention. “It’s important for individuals to be mindful of their spending habits and their capacity to repay before taking on multiple credit cards,” says Sharma, stressing on the importance of reading the fine print, particularly in zero-interest EMI offers, to avoid hidden fees.
However, Sharma also observes that the percentage of credit card defaults, relative to the total outstanding is not yet alarming at this time. “The Non-Performing Assets (NPAs) related to credit cards in India are relatively low, likely around 2 per cent of the total outstanding debt. This suggests that, while there are defaults, they are not yet a significant concern for the overall economy,” she says, maintaining hope that responsible credit card usage along with financial discipline will continue to prevail across India, thus balancing the new trends in consumer credit with the nation's traditional saving habits.
Shubhashis Gangopadhyay, founding dean of Indian School of Public Policy (ISPP) and founder and research director of IDF, shares a similar view. Gangopadhyay acknowledges the personal hardships caused by debt but points out a broader macroeconomic issue: the disparity between high consumer spending and low investment levels in India. He highlights a need to delve into why investment rates are low, particularly among younger generations, to understand their financial priorities and behaviours.
Jagdish, a 26-year-old, who works as a steward at a Napean Sea Road residence, for example, ran up a bill of over a lakh on a credit card and borrowed an additional two lakhs from his employers to pay for his wedding last year, simply because he had his heart set on top-tier wedding photography. And he doesn’t lose sleep thinking about how he’s going to pay this back either, he says.
“I’ll borrow the money from someone,” Jagdish says, when asked if he worries about the compounding interest on that loan. He pulls up a video on his phone to demonstrate what he considers to be a great investment, a wedding that his loved ones are still talking about: Shot at his village in Teonthar, Madhya Pradesh, the wedding video he proudly shows us includes professionally shot drone footage.
Like him, RH, a 29-year-old media planner from Kandivili, ran up a massive bill on his credit card to pay for his wedding. “That was five years ago,” he recalls, “I felt a little extravagance on our special day won’t hurt.” But reality struck hard and fast. Just weeks after the wedding, his father suffered a stroke and once again, credit cards were used to pay for medical bills.
“As we juggled between hospital visits and work, our financial burden grew, unnoticed in the shadow of our worry for my father.” Then, as if testing the newlyweds’ resolve further, leakages in their apartment caused extensive damage and necessitated costly repairs.
The pandemic's backwash two years ago continues to echo into 2024. Despite these challenges, RH and his wife Trishla, who both had steady incomes and were expecting bonuses and increments, remained optimistic. But the COVID-19 pandemic struck a severe blow. Trishla faced a pay cut, and RH lost his job, leaving them with mounting credit card bills.
This crisis prompted a drastic lifestyle change for the couple. “Holiday plans were put on the backburner, we stopped dining out and ordering takeaways almost completely. We learned to find joy in small things like a game of carrom and old Bollywood movies,” says RH. Although they managed to pay more than the minimum on their cards and avoided aggressive collection calls, the pressure was intense.
“As the markets began to recover, we took a call to sell off our investments and pay off the credit card debt we had accumulated. Even though there are days when I wish I had held on to some of those stocks, I also remember what a burden was lifted on that day. It was like being released from a chokehold,” says Trishla.
RH's situation, though challenging, aligns with Gangopadhyay's perspective that debt fluctuation is often linked to employment status and is not necessarily indicative of a systemic economic issue. “The fluctuation in a person's debt is often tied to their employment status. An increase in debt might occur during a job loss, but it's usually addressed once stable employment is resumed.
Therefore, the total debt amount shouldn't be the only thing you look at,” he says. Gangopadhyay suggests that a more insightful analysis would involve examining the annual default rates and the entry of new borrowers into the market. This, he feels, would help us to understand whether the observed trends indicate a significant problem or are just a normal part of a dynamic financial landscape.
Gangopadhyay does however identify the rise in credit card debt and defaults as symptoms of a larger issue: the lack of financial literacy. He stresses the need for education in household finance, an area often overlooked in current economic and finance programmes. “While many programmes cover broad economic topics, few focus on essential personal finance skills.
There is a lack of financial literacy in both rural and urban areas, and there’s also a significant gender divide,” Gangopadhyay says. Clearly, as these accounts have shown, there is an urgent need for educational and policy reforms to protect the financial well-being of Indian households in a rapidly changing economic environment.
The Debt Rattle
Credit card defaults rose to Rs 4,072 crore at the end of March 2023, according to the RBI
Outstanding credit card debt reached Rs 2.10 lakh crore in March 2023, up from Rs 1.64 lakh crore in March 2022
Credit card defaults have risen by Rs 951 crore in FY23 from Rs 3,122 crore in FY22
A study by TruBoardPartners noted that the amount outstanding on credit cards nearly quadrupled from FY21 to FY23, while transaction value doubled
Debt dread: What You need to Know about plastic life
● Credit card defaults severely affect credit scores and can remain on the record for up to 7 years and complicate your future borrowing efforts
● The high-interest rates on credit cards (up to 42%) compound debt quickly, significantly increasing the owed amount over a short period
● Paying only the minimum due extends the repayment period and substantially increases the total interest paid. Plus, late payment fees and other charges add to the debt, often unnoticed by cardholders
● Credit card activities are reported to credit bureaus, affecting overall credit history, not just with the issuing bank
● Prolonged defaults can lead to legal action, including lawsuits and involvement of debt collection agencies
Credit card survival manual
Save for credit: Set aside an anticipated amount for your credit card bill every month.
Prepay: Make a prepayment with every salary or early-in-the-month receipt
Automate: Keep your credit card active and your credit rating high with automated payments for services or goods that are recurring and don't cost the moon, like phone bills
Lock it up: If you can't pocket your spending hand, don't take your credit card places.
Keep a low limit: Limit your credit ceiling to a low level; you'll get by the max-case scenario that way
Go beyond the minimum: If you can't make a full payment, there's no call to pay just the minimum. Pay twice the minimum; it will be a great leveller down the line
One man, one card: Having a bunch of credit cards is a recipe for disaster. Keep one card, and give it all your attention.
Credit doesn't kill credit: Paying a credit card bill with borrowed money, or worst of all, with another credit card, is financial folly. Do not get to this point.
