5 major credit card risks you should know before swiping

With credit card usage in the nation reaching new highs, the risks linked to irresponsible spending and improper debt management are also on the rise. Growing reliance on plastic money, especially among young users attracted by easy credit, digital applications and reward points, has led to a sharp increase in defaults and financial stress.

This growing credit card debt crisis in the country highlights the urgent need for financial awareness and responsible usage to avoid long-term damage to the lives of borrowers especially the young borrowers in different states of the country. 

Keeping these facts in mind, here are five major credit card risks every user in the country should be aware of:

Credit card interest can trigger long-term debt

Credit card interest rates in India are among the highest in the lending industry. The RBI has mandated all the banks to set a ceiling rate of interest, including other associated charges, processing fees etc. Still, specific interest rates can vary across banks.

Several users fall into the ‘minimum due’ trap, paying only a small portion of their total bill. This leads to compounding of interest and mounting debt. This issue is especially prevalent among young credit card users.

Credit card NPAs soar amid rising defaults

Credit card non performing assets (NPAs) have recently seen a serious increase. According to RBI data, NPAs in the credit card segment have risen by 28.42% to ₹6742 crore during the 12-month period that ended in December 2024. This development marks a substantial rise from ₹5250 crore in December 2023.

Further, over a four year span, NPA’s have spiked by more than 500% from ₹1108 crore in December 2020. That is why this possibility of defaulting on credit cards should also be kept in mind while aiming to use these credit instruments.

Youth and credit cards risk over-leverage

Young Indians are increasingly using debt instruments such as credit cards for even purchasing non-essential products. This is done by often relying on EMIs. This behaviour, coupled with easy availability of credit, has resulted in higher default rates.

Many young credit card users are consistently maxing out their credit limits and often avoid repayment, contributing to rising NPAs. That is why, before applying for a new credit card you should be aware of the concept of overleveraging and avoid such practices to keep your financial health in order.

Credit card debt threatens wealth building

The comfort and convenience of credit cards can reduce long term savings. As mounting debt can force credit card users to divert funds from investments such as SIPs, mutual funds etc., thus delaying key financial goals. That is why, one should keep in mind that extensive use of credit cards can result in a change of priorities.

Hidden credit card fees drain your money

Furthermore, beyond interest rates, credit cards also come along with multiple hidden costs and charges. Late payment fees, annual charges and processing fees are some of them. Also, missed payments can result in lowering your credit limit and damaging your credit score. That is why this risk of credit cards should also be always kept in mind while using these credit instruments in day to day lives.

Smart credit card tips to protect your score

• Focus on paying the full outstanding amount to avoid interest accumulation.
• Stay vigilant against uninvited credit card offers, cashbacks and online frauds.
• Try to limit credit card usage to indispensable purchases only.
• Carefully check your statements regularly to detect any unauthorised activity.

There are several important rules of credit card usage that can further help you in efficiently managing your credit cards and your overall finacial health. Rules such as the 2/3/4 rule, 20/10 rule among others. Some of these ideas are briefly discussed below: 

What is the 2/3/4 rule for credit cards?

The 2/3/4 rule for credit cards simply suggests applying for no more than 2 credit cards every 2 months, 3 cards every 12 months, and 4 cards every 24 months. This helps maintain a healthy credit score, a strong credit profile and avoids multiple hard inquiries. It also ensures responsible credit behaviour, especially for users looking to optimise credit card usage.

What is the 20/10 rule for credit cards?

The 20/10 rule for credit cards advises keeping total credit card debt below 20% of annual income and monthly payments under 10% of monthly income to maintain financial discipline.

Therefore, with responsible usage of your credit card you can completely transform your financial profile and boost your credit score.

Top 5 ways to improve your credit score

1. Pay your credit card and personal loan EMIs on time to boost your credit score.
2. Maintain a healthy and recommended credit utilisation ratio of below 30% to improve creditworthiness.
3. Regularly check your credit report for errors, mistakes and get them corrected promptly. 
4. Avoid applying for multiple credit cards or personal loans in a short period of time. 
5. Ensure that you keep older credit accounts active to build a long and healthy credit history.

Hence, if used wisely credit cards can be a fairly convenient tool that can help in efficient financial management. Still, misuse or over extension of the credit utilisation ratio or ignorance of their associated risks can lead to long-term financial challenges.

For all personal finance updates, visit here.

Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit scores. Mint does not promote or encourage taking credit, as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.