Credit card rewards allure masks true cost of revolving debt

Credit card reward programmes have become increasingly popular among Indian consumers, with issuers dangling promises of points, cashback, and travel benefits to attract users. However, financial analysts caution that cardholders frequently underestimate their actual expenditure when factoring in interest charges and fees associated with carrying a balance.

The mathematics of credit card debt can quickly work against consumers who fail to pay their outstanding balance in full by the payment deadline. Interest rates on credit card balances in India typically range from 36 to 48 percent annually, substantially eroding any gains from reward programmes. A cardholder earning 2 percent cashback while paying 40 percent interest on an unpaid balance faces an unfavourable equation.

Behavioural economists note that reward schemes create a psychological incentive to spend beyond planned budgets. The perceived value of future benefits can encourage higher transaction volumes, ultimately leading consumers to carry larger outstanding balances than they would otherwise maintain. This phenomenon, known as the "moral licensing" effect, has been documented extensively in consumer finance research.

Financial advisors recommend that Indian consumers treat credit cards primarily as convenience tools rather than credit facilities. Cardholders who consistently pay their full monthly statement balance within the interest-free period can genuinely benefit from rewards without incurring debt charges. Those unable to maintain this discipline may find traditional debit cards or cash-based budgeting more economically prudent.