Credit growth in the banking system hit a multiple-year low in the Financial Year (FY) 2016-17. But don’t make the assumption that credit demands have vanished permanently.
It’s just shifted from corporate customers to individual ones. If credit card usage is the parameter to go by; apparently, credit demand is refusing to back down. In fact, the use of plastic money has reached unprecedented levels.
As on June 30, 2017, 31.47 million credit cards were active in the Indian banking system as against 25.54 million a year ago—a jump of 23.23%. Some of India’s leading banks have witnessed 14%-40% growth in the new credit card issuances. While some banks have seen expenditure via credit cards as high as 74%.
What has fuelled such exponential growth?
During demonetisation, many individual spenders switched to card-purchases from cash-purchases. This trend was sustained as the supply of new currency remained short for a considerable duration. As the growth in institutional credit cooled off, banks became aggressive on the expansion of their retail portfolio, and card issuances took centre stage. Besides offering a standard credit period of 40-45 days, they also offered attractive cash backs to win customers over and induce them to spend more through credit cards.
Mr Sumit Bali, senior executive vice president & head, personal assets, at Kotak Mahindra Bank stated that, "The demonetisation and the increase in digitisation in banking transactions have on-boarded a number of customers to the credit card platform. About 90% of our cards are to either the liability or the asset-side customers. Increase in use of credit bureau also help us understand customer behaviour while on-boarding them to our platform." Kotak Mahindra Bank has been the fastest-growing bank as far as issuances of new credit cards go.
A message for individual spenders…
While there’s nothing wrong with using a credit card, indiscriminate usage always has its downsides. If you live beyond your means for a prolonged period of time, credit facility quickly turns into a debt trap —the first step towards ruining tranquillity.
So, here are tips for using credit cards wisely and getting out of the debt trap:
Adjust your lifestyle vis-à-vis income and outgoings: Most credit card debts pile because we fail to keep a check on our expenses. Most credit card purchases are impulsive and indulgent, especially at the time of a sale or festival discount. The best way to work towards a lifestyle change is to put a budget in place. For most, a budget sounds boring but sticking to it pays rich dividends in the long run. The key to a successful budget is to be as realistic as possible. Take a decision and cut down on unnecessary, out-of-reach wants/desires/aspirations and unwanted expenses as much as possible. Though it may be hard at first to make lifestyle changes, remember the road to financial freedom is worth every paise.
Know your expenses: Go through personal bank statements and find out the expenses you pay for through your credit card—regular committed expenses (telephone bills, electricity bills, gymnasium membership, insurance premiums and EMIs etc) and variable expenses (restaurant meals, entertainment and travel). This will act as a good foundation stone to lay down your budget.
Take stock of the situation: Until you know where you stand, it is even more challenging to work out a strategy to get out of debt. If you use multiple credit cards, make sure you write down all the credit card dues along with the interest rate you have to pay.
Prioritise your repayment: Once you have determined a method to budget your expenses and pay off your dues, you must start implementing the same. Do not delay or procrastinate these payments as the debt amount keeps increasing. It is also prudent to keep a track of your progress. You must revisit your finances in a disciplined manner to ensure that you have not deviated from the planned course of action.
Renegotiate the interest rates: Renegotiating the interest rate with your credit card company would help you save a lot. Even a few hundred saved could be directed towards a long term goal. At times, all it takes is a phone call to your Relationship Manager asking for honest help to get out of the debt.
Pay through cash: We are all emotional in a way. It is our “impulsive” desire to possess/buy that makes him pull out his credit card and swipe it. The best way to handle this urge is to use cash as much as you can. It seems difficult at the start but as you see cash leave your pocket, the emotional side takes over.It is a painful exercise to see hard cash leave one’s pocket, isn’t it? Dave Ramsey, a US based personal finance expert, suggests a “cash only” lifestyle and to get rid of all the credit card debts. He even goes on to add that responsible use of credit card simply doesn’t exist.
Avoid taking a loan on your credit card: Most individuals take a credit card loan because it is faster and less cumbersome than other forms of loans. More often they ignore the interest rate that they pay on taking credit card loans. Credit card loans charge an interest between 36 to 40% vis-a-vis an unsecured personal loan (which charges 20-25%) – which is also expensive - and a secured loan (such as a home loan, top up loan or loan against your insurance policy). Evaluating all the available options is important before signing on the dotted line. A burgeoning credit card or any loan can impact your CIBIL score, and you may not get one when you are approaching a more important need or a financial goal such buying a dream home.
Take help of a financial planner: It is always advisable to seek opinion of a financial guardian who can show you the path to financial freedom and wealth creation and in the journey even help you recognise nuances. The action steps shared by a financial guardian can enlighten you and bring down on the debt vide a prudent strategy.
PersonalFN believes that owning a credit card is not a bad thing as long as you know the means to service your dues. As Dave Ramsey puts it, “Personal Finance is about 80% behavior and about 20% head knowledge”. There’s an old adage for financial discipline, “Live within your means” – follow it thoroughly.
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