Flush with cash and low-cost credit, consumers shun credit card debt

• August credit card outstanding balance slips by Rs.76mn after rising 2 months in a row
• Total number of active credit cards increased by nearly 8,000 to 1,870,827

The outstanding balance of credit cards slipped in August—although the private sector credit, a key gauge of the dynamism of economic activities, recovered in the same month—implying that people are either using cash to pay their credit card debt or shifting to more medium-term borrowings at single-digit rate cost than paying at nearly 20 percent for their credit cards. 

Total outstanding credit card debt slipped by Rs.76 million in August to Rs.118.1 billion, after rising for two months in a row in June and July. Markets have been flushed with cash and low-cost credit and people may have been refinancing their debt at cheaper rates, as borrowing costs are coming down faster than expected.  

People and companies set aside their earnings during March-May lockdowns to confront the worst from the coronavirus pandemic, which led to one of the largest build up of deposits in the banking system. 

According to the Central Bank data, from April through July, total savings and time deposits shot up by Rs.350 billion, indicating that both consumers and companies curtailed spending, leaving them liquid. 

Hence, many may have used such moneys to pay down their credit card bills, contracting the outstanding card debt. However, the total outstanding private sector credit rose by a robust Rs.78.3 billion in August. Private sector credit includes credit card debt. 

Some of the borrowers are also suspected of resorting to lower cost medium-term borrowings via personal loans, which are relatively easier to obtain nowadays, shunning their credit card debt, which costs at least twice compared to personal loans. 

The Central Bank in August revised down the regulated maximum interest rate on credit cards to 18 percent, from 28 percent, as the interest rates in the broader economy have come down.

Despite the short contraction in the credit card debt, the effects of this action could be seen in the months to come, as people could be more inclined to swipe their cards at merchants than they were when the rates were at 28 percent or above.  Meanwhile, the total number of active credit cards increased by nearly 8,000 in August to 1,870,827.