In one of our previous blogs, we have seen the Debt Trap and how not to get trapped in it. ‘Credit Card’ is a useful debt but that can be the most dangerous trap. In this blog, we will see the basics of credit cards and their possible impact.
Context
For many years, payment gateways in India have been expanding and rising at a rapid rate. Today, we have other alternatives for completing a financial transaction, but our preference has remained the Credit Card, as seen in most cases. We become habitual to use credit cards, whether we want to place an online order or book a reservation at a renowned restaurant, isn’t it?
In simple words, a credit card is like a special tool that lets you borrow money from a bank or a financial institution when you want to buy something. Imagine it as a short-term loan that has a limit, and a billing cycle with a due date.
Now, here comes the trickiest part and that is the due date and “Interest” part that accumulates if you don’t pay the full amount. In that case, the bank will charge you extra money called (interest). It’s like a fee for borrowing their money. Interest gets accumulated till the time you pay the money back you borrowed. And trust me this interest (%) is heavy and the amount payable becomes huge after some period of time.
Let’s understand what a credit card default is.
Understanding Credit Card Default
Credit card default is not just all about missing your credit card payments. It is a half-baked truth.
Missing your credit card payments once or twice is not considered a default; nevertheless, it is considered a default when you fail to pay the Minimum Amount Due (MAD) for several consecutive months. Though a credit card company will warn the user to pay off after six consecutive missed payments, it is the cardholder’s responsibility to do so.
If you fail to pay back your credit card payments on time, you may face significant interest charges and become a defaulter.
The Scenarios when you may become a Defaulter
• Failure to pay credit card bills by the due date
The credit card company provides monthly credit card statements. You may have missed reading the proper due date or been misled by one. If this occurs, your perplexity may cause you to become a defaulter.
• Exceeding the Allowed Spending Limit
Overspending on your credit card is a big no-no. However, if you do so and fail to return the money, you will quickly become a defaulter.
• Postponing payment on credit card bills
When it comes to credit card payments, procrastination is extremely detrimental. Failure to make the imposed fees might cost you a fortune in seconds. If you leave your credit card payments to the last minute, you are putting your wallet in danger of large fees.
Consequences of Credit Card Default
The following are some of the most serious repercussions of missing credit card payments:
• Legal Action against you
If you miss many credit card payments constantly, your credit card provider can consider you a defaulter or fraud. And Credit card provider can file legal cases against you. Hence, pay your credit card bills on time to avoid excessive interest charges and legal action from the regulatory agency.
• Negative Impact on the Credit Score (such as Low CIBIL)
The first thing that happens to you is your credit score (i.e. CIBIL) will be affected as a result of your credit card defaults. Missed or late payments will lower your credit score. No bank would be interested to grant a loan to a person with a low CIBIL score. Hence, it is important to pay your bills on time to improve your credit score and trustworthiness.
• Higher Interest Rates
If you do not pay your credit card bills on time, you may be charged a high-interest rate. Interest rates might reach 40% p.a., which is huge. Thus, to avoid getting trapped in this, please ensure to pay your bills on time.
• Blocked Credit Card Account
A key result of credit card delinquency is a banned account. If you frequently fail to pay your credit card payments, you will be considered a fraud and your credit card account will be stopped. To overcome this situation, we recommend you pay your credit card payments in advance. A banned credit card affects not just your credit score but also your urgent credit demands.
• Acquisition of Your Assets
Bank can take over your assets in the event of a credit card default. This sounds scary. But it is true. Banks can seize your bank accounts to clear your outstanding amounts if you do not pay your credit card bills on time. In rare cases, banks may seize your property, assets, and so on in order to pay off your defaults.
What are the measures to be taken to avoid this?
• You can put timely reminders on your phone or email to remind yourself about credit card payments.
• Auto-Pay is the best option. Almost all credit card has this Auto-pay feature. Go for it to avoid any payment delays.
• Spend money with credit cards only when you know how you are going to pay it off and you have the fixed source of income or your income is receivable shortly.
• Don’t wait till the last minute. Pay it off as soon as you receive the monthly statement or when you have money.
• It is always recommended to pay the full bill amount. But, at least pay the Minimum Amount Due (MAD) before the last date.
Key Take-Aways
‘Credit Cards’ are not bad. It is very useful in case of emergency. Or even sometimes they do have good offers on purchases and you can save money by using credit cards. However, being addicted to using credit cards is wrong.
The best way to use a credit card is when you already have money with you. Yes…you read it right.
For example, you have Rs. 1 Lac in your bank account and you want to purchase a laptop. You can purchase a laptop by using a credit card to avail of offers and you let Rs. 1 Lac be in your bank account. Now, there are three benefits of this. First, you can avail of good offers, second, you are going to earn interest on Rs. 1 Lac till the due date and last and you will never default as you already have money on the due date. This is the best possible way to use credit cards.