Credit card defaults on the rise: Here are ways to get rid of debt quickly

Defaults on credit card shave increased in June 2023 quarter, a recent report by Transunion CIBIL revealed. For over 90 days past due (dpd), the delinquency rate surged 66 basis points compared to the previous year, to reach 2.94 percent. Delinquency means nonpayment of a debt when due.

The number of unsecured loans payment defaulters in India, on the other hand, has increased to 32.9 percent in the personal loans segment as of April 21, 2023, compared with 31.4 percent from a year ago. According to Reserve Bank of India's (RBI's) Financial Stability Report (FSR), the public sector lenders’ gross non-performing assets (NPA) in the credit card segment stood at 18 percent, while private sector banks reported a GNPA of 1.9 percent in FY23.

Foreign banks’ credit card gross NPA ratio was 1.8 percent during the previous fiscal.

According to Manavjeet Singh, MD & CEO at CLXNS, a digital debt resolution company, the rise in credit defaults is due to a number of factors, including the rising cost of living, job losses and the economic slowdown.

Echoing his view, Anand Agrawal, Co-Founder & CPTO at Credgenics, said, "With the growing popularity of digital commerce and rapid growth of online transactions, consumers are getting used to unprecedented ease in making purchases and availing finance. This, unfortunately, also presents a greater risk of impulsive buying and a potential lack of financial discipline."

According to Singh, the debt collection industry can play a vital role in helping to mitigate this situation by providing solutions to help defaulters repay their debts.

"By being more understanding and empathetic, offering flexible payment plans and working with defaulters to get back on track, the debt collection industry can help people get back on their feet financially," he said.

Agrawal further said that card and loan issuers should prioritise responsible lending practices while ensuring that credit limits are granted in alignment with borrowers’ repayment capacity and reviewed over time in line with the prevailing dynamic economic scenarios.

"It is crucial to emphasise financial literacy programmes, educating consumers on the responsible use of credit and the importance of maintaining a healthy financial profile. Today, technology can play a pivotal role in mitigating credit card defaults and also mitigating the risk associated with new-to-credit (NTC) segment. Innovative use cases are being explored to identify patterns of risky behaviour and proactively intervene to prevent defaults. Early identification and personalization of strategies goes a long way in resolving the default cases at an early stage," Agrawal said.

Advanced data-backed systems powered by machine learning capabilities have helped many banks, NBFCs, and fintechs transform their loan collections approach with holistic segmentation, actionable insights, borrower behavioural indicators and personalisation strategies for debt resolution. Lenders also need to empower their consumers with personalised financial guidance to prevent defaults and resolve the cases amicably.

Balance transfer is a kind of refinance facility, which enables the borrower to transfer outstanding facility of one credit card to another with lower interest rate.

This strategy helps cardholders in getting rid of the debt burden, if they have multiple credit card loans. Here cardholders can prioritise the loan on the basis of the outstanding balance amount.

Cardholders can also choose to convert their outstanding dues into EMIs for repaying their outstanding dues. Depending on their repayment capacity, they can either convert the entire credit card bill or select card transactions crossing a specific threshold into EMI.

Cheaper loan options like personal loan can also be opted for repaying credit card outstanding. While the rate of interest of EMI conversion facilities primarily depends upon the credit cardholder’s credit profile, the interest rates are usually higher than personal loan interest rates available from the same lender for the same credit profile.