Credit Card Debt Trap: How to save yourself from this trap

Credit Card Debt Trap: How to save yourself from this trap

Credit Card Debt Trap

Credit cards help you to make a great credit score and earn great rewards. Not only that, it can help you to pay for anything without needing to carry cash everywhere. But there’s another side of credit cards that many people ignore until they get trapped in it, that is the Debt trap of credit cards. So, what is this debt trap and how do people fall into it, and how to avoid this altogether? Let’s discuss these points and save ourselves from any kind of Credit Card Debt traps. Let’s start.

What is a Credit Card Debt Trap?

“Debt is like any other trap, easy enough to get into, but hard enough to get out of.” – Henry Wheeler Shaw.

This is a wonderful quote representing the situation of the Debt Trap. So, what is Credit Card Debt Trap? It is a situation where a person owes more money on the credit cards than he or she can afford to repay the credit card provider.

This situation happens when a person can only pay the minimum amount on that credit card every month. Or in other situations, if you take more credit card debt than you pay every month.

What might seem like a simple and manageable balance on a credit card can slowly snowball into an unmanageable debt situation in no time?

What is a Credit Card Debt Trap

The Stats of Credit Cards

Total number of credit cards increased to 8.53 crore in FY2023 from 7.52 crore in FY2022.
Gross non-performing assets (GNPA) in the credit card segment of banks rose by Rs 951 crore to Rs 4,073 crore in the fiscal ended March 2023 from Rs 3,122 crore in the year ended March 2022.
Total number of credit cards increased to 8.53 crore in FY2023 from 7.52 crore in FY2022.
During the previous fiscal, the banking system’s gross NPA ratio in credit card receivables stood at 2.02 percent, the RBI said in a reply to an RTI filed by The Indian Express.

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So, over the 12 months:

  • You paid $324.63 towards interest.
  • You paid $560.00 towards the principal. Total payment 885.
  • This does not bring your balance to zero. Instead, you still owe $770.43 as given in the table from the previous example. This outstanding amount is the remaining part of the original principal (i.e., $1,000 – $560.00 = $440.00) plus interest accumulated on it.

The Allure of credit cards

Credit cards provide great rewards and offers that make them very tempting to use. The different conveniences like the reward and points with cashback along with cashless transactions and the biggest of them all, the ability through which you can buy that product without paying for it. These are some of the draw people towards credit cards.

How people slowly fall into this trap?

people slowly fall into this trap

There are multiple reasons why people fall into this trap:

1. Just paying the minimum amount: This is the most common one, where people pay just a minimum amount that’s due on the credit card. This seems like a very small payment. What happens here is, you are only paying the interest amount without even touching the principal amount.

2. Misunderstanding the interest rates: The Interest rates on Credit cards are high, and this can lead to debt accumulation over some time. This can lead to interest on the interest, which leads to you paying the interest on the interest itself.

3. Multiple Credit Cards: Having many credit cards and paying debts through them can get you into a vicious cycle.

4. Ignoring T&C: If you don’t understand the terms and conditions you can pay unexpected charges and penalties.

Consequences of falling into the trap

1. Financial Consequences: from high rates of interest to penalties, this can further lead to years to overcome these penalties.

2. Emotional and psychological consequence: The stress of paying for a credit card can have an impact on mental and psychological well-being.

3. Impact on credit score: When you accumulate too much debt, it directly impacts your credit score thus affecting your ability to take loans in the future.

External factors contributing to the impact

1. Aggressive Marketing: Credit card companies are great at doing aggressive marketing which is tempting for most people to get multiple credit cards and these people don’t think about the future consequences.

2. Societal pressure: The pressure of society to have a certain lifestyle leads, even if it’s unaffordable, can be a reason for overspending on credit cards.

3. Financial Literacy problems: Without any proper financial education people spend on credit cards irresponsibly.

The Role of Banks and Financial Institutions

1. Lacking Transparency: Many Credit Cards have unclear terms and conditions, making these people overlook even the basic pitfalls.

2. Higher interest rates: The reason for higher levels of interest can lead to debt escalation quickly.

3. Targeting vulnerable people: Credit card companies specifically target individuals who don’t have proper financial literacy and cannot make decisions based on financial stats.

Stories and Case Studies

The struggle of Rekha: Rekha’s debt situation got even worse when she just paid the minimum amount due. Her journey in this situation shows the importance of taking proactive action.
The Recovery of Sashi: Shahshi’s proper planning along with discipline helped him overcome his credit card. His story shines on the aspects of the effective management of credit cards.

Solutions to avoid debt traps

1. Financial education: It’s extremely crucial to understand the terms and conditions of credit cards for effective use.
2. Smart usage: You should pay the full amount of your credit card bill every month. This can easily help in cash advances along with it you should review credit card statements as well.
3. Build an emergency fund: You should have a safety fund or emergency fund always ready for unexpected situations. This can lead to you relying less and less on credit cards.
4. Limiting the number of credit cards: Managing the number of credit cards directly affects the way you spend on credit cards.
5. Professional Help: Seeking effective guidance from different financial advisors along with credit services and counseling can help with tailored solutions.
6. Lifestyle choices and self-discipline: Living the lifestyle that suits and is within your financial means and choosing to purchase what’s necessary are required for great financial health.
7. Regulation & legalization: The governments also need to reinforce stronger regulations on companies operating these credit cards for the protection of consumers.


The trap of credit cards is a big challenge but still, it’s surmountable. By understanding all the pitfalls of credit cards customers can take well-informed and great financial decisions. That’s what Wealthcare is doing. Helping people to make better-informed decisions about Systematic investment plans and SIP mutual Fund along with the best SIP to invest for Mutual Fund SIP. Whether it’s SIP or credit cards, making informed and healthy financial decisions is the key to great financial success.

CA Mukesh Gupta
CA Mukesh Gupta
Mukesh Gupta is the founder and director of Wealthcare. He is Fellow chartered accountant, Certified Financial Planner and Certified Public Financial advisor. He is in financial services industry since 1994. He conducts free money management sessions for corporates and associations on topics related to Personal finance. His previous engagement was with Birla Sunlife group. He regularly writes on topics related to Personal finance and occasionally appear on electronic media.

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