According to recent data released by The Federal Reserve Bank of New York, US credit card debt has reached a historic milestone of $1 trillion in the last quarter. This translates to an average credit card debt of $10,000 per household. There are two types of credit card consumers: those who consistently pay their full credit card bill on time and those who carry forward a balance and do not pay in full before the due date. Shockingly, reports indicate that 46% of US credit card consumers fall into the latter category.
Credit cards typically come with high annual percentage rates (APRs), making it challenging to build wealth while dealing with such debt. This situation is particularly concerning for the younger generation.
While credit cards offer convenience and potential savings if used responsibly, they can have severe financial and mental consequences if misused. The current statistics from the US are far from encouraging, as high levels of debt, especially with the burden of high APRs, are not beneficial.
So, what can we learn from the situation in the US? Should we stop using credit cards altogether? The answer is no. Completely avoiding credit cards means missing out on their benefits. Instead, we should focus on using credit cards wisely.
Here are five recommendations for all Indian credit card consumers from me:
I have an important request for credit card issuers regarding the earning of interest on credit card balances. It is crucial for all card issuers in India to highlight the consequences of paying only the minimum amount due on the statement. By referring to US credit card statements, you will notice that they provide valuable information such as the estimated time required to pay off the total debt by making minimum payments, the additional amount to be paid after considering the annual percentage rate (APR), and other relevant details. To ensure consumer awareness, the Reserve Bank of India (RBI) should enforce a mandatory requirement for all card issuers in India to include such information on every card statement.
India's credit card market is on the rise, with only approximately 5.5% of the population holding a credit card. As of April 2022, the total active credit card count was 75,166,069, which increased to 86,512,698 by April 2023—an increase of more than 1 crore in just one year. This number is expected to grow rapidly in the coming years as we move towards the digital era. Therefore, it is crucial for us, especially millennials, to exercise caution regarding our spending habits and actual spending power.
Indian banks should also consider introducing student credit cards with low limits to educate our youth about responsible credit card usage before they transition to cards with higher limits. This approach will equip them with the necessary knowledge and understanding of credit cards, empowering them to make informed financial decisions.
Credit cards typically come with high annual percentage rates (APRs), making it challenging to build wealth while dealing with such debt. This situation is particularly concerning for the younger generation.
While credit cards offer convenience and potential savings if used responsibly, they can have severe financial and mental consequences if misused. The current statistics from the US are far from encouraging, as high levels of debt, especially with the burden of high APRs, are not beneficial.
So, what can we learn from the situation in the US? Should we stop using credit cards altogether? The answer is no. Completely avoiding credit cards means missing out on their benefits. Instead, we should focus on using credit cards wisely.
Here are five recommendations for all Indian credit card consumers from me:
- Control your spending and be mindful of your expenses. If you choose to use a credit card, it's important to practice self-control. Having credit available on your card may tempt you to overspend, but it's crucial to understand your actual spending capacity. Only spend money that you already have and can pay off after receiving the bill. To help with this, you can follow my credit card management account process. I have detailed information on it in this article: [Understanding Overspending and Strategies to Stop It].
- Pay the total amount due before the due date. This is crucial. Always pay the full bill on time. If you don't, the bank will charge you high interest on the remaining balance.
- Don't spend solely to meet milestones or chase rewards. Banks sometimes send targeted offers to customers, such as "spend Rs. 100,000 in a month and get Rs. 2,000 cashback." Millennials, in particular, may tend to overspend just to meet monthly, quarterly, or annual milestones. However, it's important to remember the first point I mentioned: never overspend. So, don't spend money just to earn some extra rewards or cashback.
- Avoid transferring credit card balances to your bank account. Nowadays, people are finding different ways to transfer credit card balances to their bank accounts, enabling them to use the credit card limit for activities not directly allowed. For example, many millennials transfer their credit card limit to their bank account and use it for stock market trading, ignoring the significant risk involved. Unfortunately, this misuse of credit cards often leads to blaming the credit card later when faced with financial difficulties. I urge all consumers to stay away from such practices.
- Remember that a credit card is for saving money while you spend, not as a source of income. Nowadays, many millennials use cashback credit cards to make purchases for others, such as friends or relatives. There are websites like Yapper that allow users to order items for someone else for a small commission. I'm not suggesting that everyone completely stop using their credit cards for others, but it's crucial to be cautious. At the end of the day, you're the one responsible for paying the credit card bill. Using a credit card for others to fulfill small yearly milestones may be acceptable in my opinion, although personal credit cards may not allow such transactions according to the bank's MITC (Most Important Terms and Conditions). Ultimately, the choice is yours, but please exercise caution.
I have an important request for credit card issuers regarding the earning of interest on credit card balances. It is crucial for all card issuers in India to highlight the consequences of paying only the minimum amount due on the statement. By referring to US credit card statements, you will notice that they provide valuable information such as the estimated time required to pay off the total debt by making minimum payments, the additional amount to be paid after considering the annual percentage rate (APR), and other relevant details. To ensure consumer awareness, the Reserve Bank of India (RBI) should enforce a mandatory requirement for all card issuers in India to include such information on every card statement.
India's credit card market is on the rise, with only approximately 5.5% of the population holding a credit card. As of April 2022, the total active credit card count was 75,166,069, which increased to 86,512,698 by April 2023—an increase of more than 1 crore in just one year. This number is expected to grow rapidly in the coming years as we move towards the digital era. Therefore, it is crucial for us, especially millennials, to exercise caution regarding our spending habits and actual spending power.
Indian banks should also consider introducing student credit cards with low limits to educate our youth about responsible credit card usage before they transition to cards with higher limits. This approach will equip them with the necessary knowledge and understanding of credit cards, empowering them to make informed financial decisions.
