As India’s demand for credit rises, can the credit card industry step up

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India has about 77 million active credit cards, more than the entire population of the UK, and that’s after the Reserve Bank of India’s directive to banks to discontinue inactive credit cards. Credit card issuances have been on the rise in the last few years, coinciding with growing aspirations in terms of lifestyle and demand for credit.
The credit card business in India has also evolved with simplified and online
credit card applications
, multiple forms of credit cards that cater to specific needs, virtual cards with more controls on spending and personalised offers and rewards. These improvements have contributed to increasing credit card usage among existing cardholders while attracting new users from beyond tier-1 cities.

Time to re-evaluate the definition of creditworthiness?

ET Spotlight

Despite the large number of credit cards, the figure is barely a fraction of the total working-age population of the country. The actual number of credit cardholders will be lower still considering the fact that people hold multiple cards. Although huge advancements have been made in terms of financial inclusion, there is still a wide gap when it comes to giving Indians access to credit.

Most credit cards have various eligibility requirements ranging from income levels to credit history. This excludes a large part of the population that cannot clear this criteria. According to a World Bank report, about 229 million Indians were still unbanked in 2021. This makes the lack of a bank account or formal credit history a major barrier for lenders and borrowers alike.

The challenge of financial literacy is another reason that hinders credit access. Even though they are one of the most convenient ways to get a credit line for both personal and business use, a large part of India’s adult population is not aware of basics like
what is a credit card

and the benefits of responsible credit usage.

Bridging the credit gap

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The variety and capability of personalisation of products in the financial sector today means that credit cards can be customised to address various financial needs. People without a formal credit history can apply for prepaid credit cards. The credit limit on such cards are based on a collateral amount that you deposit with a bank. This can be used to build a good credit score which improves access to cheaper credit.

Lack of financial literacy can result in irresponsible credit card usage without knowledge of the consequences apart from making people more susceptible to financial fraud. There is a general perception that credit cards lead to a debt trap. But most people are not aware that if used optimally, you can save a lot of money through
credit card rewards

. Financial products with features designed to educate users about appropriate credit usage can help improve financial literacy and credit usage.

Benefits of credit cards

Credit cards are accepted by almost all retailers and offer an alternative to digital payments. If used well, credit cards give you an interest-free loan with every billing cycle. They come in handy during emergencies when you need to make a large payment such as hospitalisation. With features like spending limits and card freeze and easier transaction reversal, credit cards also offer improved safety over other payment methods.

One big benefit of using a credit card is the opportunity to build a credit history. How you use your card affects your credit score, which defines your creditworthiness. Lenders use credit scores to assess whether you qualify for a loan and if you qualify for low-interest rates. A
credit card usage best practice
is to always pay the bill in full.

Financial intelligence

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Different credit cards are aimed at different forms of expenditure such as travel, online shopping or dining. The best way to maximise the benefits of a credit card is to choose one that aligns with your spending pattern. This will ensure that you get the most rewards and savings for your spending.

But to do this, you need to be aware of your spending behaviour. One method is to track your expenditure using third-party apps or maintain a spreadsheet. A better method is to
open an online savings account
on the Fi Money app. It not only automatically tracks your spending, you can also link other bank accounts and track all your money in one place.

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