Credit card: 5 hidden dangers you must know before swiping again

As credit card usage surges across the country, so do the associated risks and pitfalls. Recently it has been witnessed that with the rise in the use of credit cards there has also been an escalation in defaults, particularly among younger users tempted by easy credit and rewards. 

Here are five risks associated with using credit cards you should not ignore:

1. Debt trap from high interest rates

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.

2. Rising credit card 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.

3. Over-leveraging among youth

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.

4. Implications on savings and investments

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.

5. Hidden charges and fees

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.

Four key takeaways for credit card users to always keep in mind:

• 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.

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.

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.