As the festive season approaches the allure of discounts, offers, and sales becomes almost irresistible. For many, this is a time to indulge, shop, and make long-awaited purchases. With the introduction of Credit Cards on UPI (Unified Payments Interface), consumers now have an even more convenient way to spend. However, this convenience comes with its own set of risks, particularly the potential for debt accumulation.
“Credit on UPI has been around for almost two years now. A significant uptake in issuance has occurred over the past 12 months, leading to more stabilised usage and maturity trends,” says Mohit Bedi, Co-Founder and CBO of Kiwi, a credit card platform.
What is the Credit Card on UPI?
Credit Card (CC) on UPI allows individuals to link their credit cards to UPI apps, enabling direct payments to merchants without the need for physical cards. By linking CC to UPI, users can accumulate rewards on all transactions, irrespective of their value. This proves to be a significant advantage compared to debit cards, which typically lack reward/offers.
While this innovation brings numerous benefits, it also requires users to exercise caution and maintain disciplined borrowing practices to avoid falling into debt.
Current Trends of CC on UPI
“We are seeing a notable increase in e-commerce and online transactions, which have risen from less than 10 per cent to nearly 20 per cent of total spending. This shift is positive for the ecosystem, considering UPI's historical strength in scan-and-pay transactions,” Bedi states.
According to a report released by Kiwi in May 2024, the adoption of 'Credit Cards on UPI' was highest among young adults below 40 (78 per cent of the users). The users on Kiwi spend more than Rs. 22,000 every month. The report showed that the average number of transactions using a CC on UPI was 21 per month, which is four times that of a traditional physical credit card.
Grocery and small merchants continue to dominate the "Credit on UPI" category, indicating that Tier 2 and Tier 3 cities will likely experience healthy spending trends in the near future.
Bedi adds, “As we approach the festive season, ‘Credit on UPI’ is particularly advantageous for physical stores and small merchants. We anticipate a significant uptick in traffic to local Kirana stores, which aligns with our strategic focus.”
The Double-Edged Sword of Convenience
The ease of using credit cards can be a double-edged sword. This innovation is a boon for those looking to manage their finances digitally while earning credit card rewards on UPI transactions. However, it also introduces a new layer of complexity to financial management, especially during periods of high spending like the festive season.
Risk of Debt Spiral
Says Chandralekha M R, (CMA, CIA) and Founder of Dime, a personal finance platform, “Credit cards linked to UPI enhance convenience by enabling payments to small vendors who may not typically accept credit cards. For example, you can easily pay for local services, street food, or purchases from small shops using UPI with your credit card.”
Paying through UPI allows you to make contactless payments and earn reward points. For instance, if you spend Rs 20,000 a month on a credit card linked to UPI and get 1.5 per cent cashback, that's Rs 300 saved monthly, or Rs 3,600 annually. However, such accessibility and ease of scan and pay can lead to impulsive purchases as well. “For example, during a sale, you might be tempted to buy a gadget on a whim, which can lead to a higher credit card bill,” Chandralekha states.
Borrowers, Consider This!
The festive season, while joyous, is also a period where financial discipline is often tested. The combination of credit availability through UPI and the bombardment of festive offers can create a perfect storm for debt accumulation.
If not careful, small transactions can add up into debt that may get difficult to manage with day-to-day expenses. “You might think, ‘It's just Rs 500’, but several such transactions can easily breach your monthly repayment capacity, resulting in debt accumulation and high-interest payments,” Chandralekha states. She lists following measures to strike a balance while using CC on UPI:
Avoid Linking Multiple Cards: Link only one credit card to your UPI app to reduce the temptation to overspend. For example, if you have a card with a lower credit limit and cashback benefits, prioritise linking that one to keep spending in check while earning rewards.
Monitor Transactions Regularly: Make it a habit to review your transactions weekly through the UPI app. For instance, if you notice multiple small transactions of impulsive purchases like food or clothes adding up to a significant amount, you can quickly identify and cut down on them.
Leverage UPI Reminders: Set up payment reminder features on UPI apps. For example, set a reminder 5 days before your credit card due date. This helps you prepare the necessary funds or adjust your spending in advance.
Maintain a Buffer for Emergencies: Keep a separate emergency fund in your UPI-linked account. For example, if you usually spend Rs 20,000 a month, keep an additional Rs 5,000 in reserve to cover unexpected expenses or ensure you don’t miss a payment.
While the introduction of ‘Credit Cards on UPI’ offers unprecedented convenience, it also requires borrowers to exercise extra caution, especially during the upcoming festive season.
The ease of access to credit, combined with the festive spending frenzy, can lead to significant financial strain if not managed properly. Approach the festive season with a clear budget, a firm understanding of your financial situation, and a commitment to disciplined spending. By doing so, you can enjoy the festivities without the shadow of debt looming over your wallet.
