Credit card defaults rise by Rs 951 cr: What happens when you default

Although the retail segment played a critical role in bank credit recovery process, the concentration of banks' loan portfolios in unsecured lending can have serious financial implications

Credit card defaults have risen by Rs 951 crore, to Rs 4,073 crore in FY23 from Rs 3,122 crore in FY22, according to data obtained from the Reserve Bank of India (RBI) under the Right to Information (RTI) Act.

Although the retail segment played a critical role in the bank credit recovery process, the concentration of banks’ loan portfolios in unsecured lending can have serious macroeconomic and financial implications.

The RBI  has raised concerns over this rise in unsecured lending on financial stability. In addition to this, the RBI has highlighted concerns over the growing risk of delinquencies on unsecured loans amidst high-interest rates and high inflation.

"Credit cardholders have increased their leverage in the last two years. While the incremental amount outstanding on credit cards has almost quadrupled from FY21 to FY23, transaction value on credit cards has doubled during the same period," said a study by TruBoardPartners.

What is credit card default? 

A credit card default happens when you fail to make any payment towards your credit card's outstanding bill for a long period of time.

"Even if you fail to make the minimum payment towards your credit card for about 6 months in a row, you may be put in the defaulter list and your credit card account would be immediately deactivated," according to Paisabazaar.

Whenever you accept a credit card, you agree to certain terms and conditions including making your minimum payment by the due date listed on your credit card statement. 

For credit cards, the amount spent is billed to users via a monthly statement with a definite due date for repayment. Users can either pay the entire amount or the minimum amount due, on the due date and roll over the balance amount to the subsequent months’ billing cycle. In case of defaults, banks charge interest rates as high as 38 to 42 per cent on outstanding dues.

 

When you miss the minimum payment by six months or more in a row, your credit card will be in default. In such situations, your credit card issuer will first send several notices via email or SMS and call you asking to make the payment. If you do not make the payment after a stipulated period, they will close your account and report the default to the credit bureaus. 

How do you get reported as delinquent?

If you still do not pay the Minimum Amount Due then the issuer will report you as delinquent. You will be marked delinquent for the number of days you haven’t paid the credit card bill.

Paisabazaar explains this with an example:

1. Suppose, you failed to pay the MAD for 5 days past the due date. In this case, you will be marked as 5-day delinquent. 
2. However, if you fail to pay the MAD till the next due date then you will be 30-day delinquent.
3. After this subsequent timeline, the issuer will increase their efforts to collect the debt from you. 
4. You will receive frequent phone calls, SMSs and emails.
5.  And, after 90 days, Loan Recovery Agents (LRAs) might pay you a visit. 
6. Some credit card providers might file a police complaint or send a legal notice while others might offer you a compromise in the form of a one-time settlement. 
7. If you do not pay off your bills for 190 days, that is, over 6 months, your credit card account will be put under the recovery pool.
8.  This is the final resolution the issuer can take. Under this scenario, the issuer will declare your account as a Non-Performing Asset (NPA). 
9. This means that the issuer sees your credit card account as a loss.
10.  Now, they may file a lawsuit against you or sell your debt to a debt collection agency.

As per the RBI Guidelines effective from July 1, 2022 card issuers have to give a 7-day notice period to cardholders, informing them about their intention to report them as defaulter to the credit bureaus and allow them to clear their outstanding dues during this period.

Credit card defaults impact your credit score
 Settlement and defaults are disastrous for your credit score. They will show up on your record for up to 7 years!

Card issuers always share your credit card details with credit bureaus like CIBIL & Experian. This will let future credit card or loan providers know that you were unable to pay off the amount who, in turn, will be hesitant to lend to you or charge a high rate of interest for it. This is because they see you at a higher risk of defaulting on future payments.
This tends to impact your credit score and it will be difficult for you to get approved for loans in the future.

Other consequences:

Banks and credit card companies tend to blacklist people who fail to make payments towards their credit cards. 

The bank will also block your credit card in order to prevent any further transactions from the card. 

Legal action can be taken in case of credit card payment default. This can be made into a civil dispute and the case can be filed in the court of law.

Since your name will be blacklisted, it will be difficult for you to get approved for loans or any type of credit in the future.

If the bank has access to your savings bank account or other accounts, funds can be used towards the outstanding bills. Apart from this, some banks may also seize properties owned by you to settle the dues.

You will be charged a penalty for late payments. Even with a single-day delay, you will have to pay interest on the outstanding amount along with a penalty for late payment. These annual interest rates (also known as APR) on credit cards may range between 30% and 45%.

Card issuers always share your credit card details with credit bureaus like CIBIL & Experian. Hence, details of your settlement or default will be shared with credit bureaus. 

Debt collection companies may harass you with calls and letters. They might even pay you a visit at your place of business or residence. 

When you default on a credit card payment, you appear as a high-risk borrower.

To reduce their own risk, they may limit the amount of credit available to them. This can lead to a decrease in credit limits on your other credit cards. As a result, your credit utilisation rate may increase, which can negatively impact your credit score and invite further complications.

How not to default: 

There are some ways you can avert a Credit Card payment default, according to BankBazaar:

You can transfer your balance to the account of another bank and pay through EMIs. The processing fees are economical and the interest on the amount transferred is waived for a limited time in the beginning.

You can take a loan to pay off your debts. The loans come at lower interest rates than the interest charged on the Credit Cards

You can request the bank to convert the due amount into EMIs, which you can pay over a limited period of time. This not only gives you an extension but also a chance to redeem your relationship with the bank for the future.

There is always the last option of selling/breaking your other investments, which can be done in a worst-case scenario. The money generated from your fixed deposits, mutual funds or gold loans can help you pay off your outstanding balance with the bank.

On your credit card's mobile app/online portal, enrol for the auto-pay option.

Set up recurring reminders for your payment due date. 

Do not use delaying tactics to pay your debt value. 

Pay at least the minimum amount owing by the deadline. 

If your financial situation has become untenable, you may consider filing for bankruptcy, which will let you restructure your debt