Prologue
- Credit card debt has seen a significant rise. By March 2024, outstanding balances reached ₹2.57 lakh crore, a 25.6% increase from ₹2.04 lakh crore in March 2023.
- The State Bank of India (SBI) reported a stable asset quality in its personal loan segment, despite concerns about defaults.
- The total number of credit cards surpassed 10 crore by March 2024, up from 8.5 crore in March 2023, indicating a 20% growth.
Introduction
Debt obligations refer to the financial responsibilities an individual, business, or government assumes when borrowing money. These obligations encompass various forms of debt, including credit cards, loans, and mortgages. Managing debt effectively is crucial to maintaining financial stability and avoiding financial distress. This report provides a detailed explanation of each type of debt obligation, their characteristics, advantages, disadvantages, and best practices for management.
Overview on Credit Cards, Loans, and Mortgages
Credit cards, loans, and mortgages are key financial tools that help individuals manage expenses and make large purchases. Credit cards provide a revolving line of credit with interest charges on unpaid balances, offering convenience and rewards but requiring responsible usage to avoid debt accumulation. Loans, including personal, auto, and student loans, provide lump sums that must be repaid with interest over a fixed term, helping fund major expenses like education or vehicles. Mortgages are long-term loans specifically for purchasing property, typically requiring a down payment and repaid in monthly installments over several years. Managing these financial instruments wisely ensures better credit health and financial stability.
Credit Cards
Credit cards are financial tools that allow users to borrow money up to a set limit for purchases, which must be repaid either in full or over time with interest. They offer convenience, security, and rewards such as cashback, travel points, and discounts. However, high interest rates and fees can lead to debt accumulation if balances are not paid on time. Responsible usage, including timely payments and keeping credit utilization low, helps build a strong credit score. Credit cards also provide benefits like fraud protection, purchase insurance, and the ability to improve financial flexibility when managed wisely.
- Credit Limit – The maximum amount you can borrow on your credit card. Exceeding this can result in penalties.
- Interest Rates (APR) – The Annual Percentage Rate applies if you don’t pay your balance in full. Higher APR means higher interest costs. Typically high, ranging from 12% to 30% APR.
- Minimum Payment – The smallest amount you must pay each month to avoid late fees. Paying only the minimum can lead to long-term debt.
Characteristics of Credit cards
Revolving Credit
- A credit card provides a revolving line of credit, meaning users can borrow up to a certain limit, repay it, and borrow again.
- Unlike traditional loans with fixed payments, users have flexibility in how much they pay each month, as long as they meet the minimum due.
Interest Charges (Annual Percentage Rate – APR)
- If the full balance is not paid by the due date, interest is charged on the remaining amount.
- Different transactions (purchases, cash advances, balance transfers) may have different APRs.
- Interest is calculated daily, increasing costs if payments are delayed.
