In India, the number of people defaulting on credit card payments is steadily increasing. According to recent data from TransUnion CIBIL, the credit card default rate reached 1.8% in June 2024, up from 1.6% in March 2023. This growing trend shows that more and more people are falling into debt traps, which can damage not only their financial standing but also their reputation and overall well-being.
If you’re a credit card user, it’s crucial to understand what happens when you default on payments and the potential consequences. Let’s break down the key issues.
How Does Defaulting Begin?
Defaults often start when people make big purchases with the idea of paying them off in small installments. However, the outstanding amount grows rapidly, sometimes as much as 48% annually, which makes it difficult to keep up with even the minimum payments.
Many people, especially young credit card users, fall into the trap of taking small personal loans just to meet the minimum payment requirements, leading them further into debt.
When Does a Credit Card Account Go Into Default?
Missing your minimum credit card payment for 30 days will cause your account to become delinquent. If you continue to miss payments for six months or more, the account officially enters default status. During this time, the bank will likely contact you to understand your situation and may offer solutions. However, if payments aren’t made, the bank may close the account and report your default to the credit bureau, severely damaging your credit score.
Here’s what happens when you default on credit card payments:
1. Late Fees and Rising Interest Rates
The most immediate consequence of not paying your credit card bill on time is late payment fees. These fees can add up quickly, especially if you continue missing payments. In addition to the fees, the bank will start charging interest on the outstanding amount. The interest rate typically ranges from 2.5% to 3.5% per month, turning a small debt into a significant financial burden over time.
2. Your Credit Score Takes a Hit
Your credit score reflects your creditworthiness and is influenced by your credit history, including how timely you pay your bills. Defaulting on your credit card payments will negatively impact your score, making it difficult for you to obtain loans or new credit cards in the future. A low credit score may also lead to higher interest rates and a reduced credit limit, adding to your financial woes.
3. Legal Action May Follow
If you fail to pay your credit card bill over a long period, the bank may decide to take legal action. In some cases, banks file civil suits to recover the outstanding amount. In extreme situations, they may even file criminal charges for fraud, which could result in legal fees and reputational damage.
4. Debt Collection Agencies May Step In
When banks struggle to recover payments, they often turn to debt collection agencies. These agencies can be persistent and aggressive, using various methods to contact you, including phone calls, emails, and letters. In some cases, they may even visit your home or workplace, causing embarrassment and increasing stress.
5. Reduction in Your Credit Limit
If you default on a credit card, banks and credit card issuers will view you as a high-risk borrower. To reduce their exposure, they may lower your credit limit on other cards, further impacting your ability to access credit. A reduced credit limit can also increase your credit utilization ratio, which further damages your credit score and limits your financial options.
6. Stress and Health Impacts
Aside from the financial consequences, credit card defaults can take a toll on your mental and emotional health. The constant pressure of mounting debt, coupled with harassment from debt collectors, can lead to anxiety, stress, and even depression. This further exacerbates the cycle of debt, as financial instability often leads to poor decision-making.
How to Avoid Credit Card Default?
Now that you’re aware of the severe consequences of defaulting on your credit card, it’s essential to know how to avoid this situation. Here are some quick tips:
- Stick to a Budget: Always spend within your means. If you’re struggling to pay off credit card debt, consider cutting back on non-essential expenses.
- Pay More Than the Minimum: If you can, try to pay off more than the minimum balance each month to avoid high interest rates.
- Negotiate with Your Bank: If you’re facing financial difficulties, speak to your bank before things spiral out of control. They might offer lower interest rates or an extended payment period.
- Set Up Auto Payments: To avoid missing a payment due date, set up automatic payments for at least the minimum amount due.
Being aware of the pitfalls and preparing yourself can help you avoid the disastrous consequences of credit card default.
